Research on discounters

A combination of the 2007 VAT hike and the discounter boom that has spread like wildfire from grocery to other sectors is severely impacting Germany’s retailing landscape, reveals a new report by Verdict Research, part of the Datamonitor Group. For the first time since 2002 the sector contracted, posting a decline of 0.9%. With a current value of €354bn, the overall retail market in Germany has receded back to what it was in 2005 meaning expenditure has been similar to that seen at the tail end of the last recession in the country. As a direct result of extremely tough trading conditions the wheels of the consolidation bandwagon have begun to turn and looking ahead Verdict Research expects more retailers to jump on.

 "The price conscious nature of German consumers is reflected in every sector of the German retail universe", says Daniel Lucht, Senior Analyst at Verdict Research and author of the report. "In DIY, Praktiker has embarked on a downsizing and price cutting exercise with its easy-to-shop concept. In electricals, Metro-owned Media Markt and Saturn, while strictly speaking not discounters, have both adopted an aggressive position on price and captured the public’s imagination with the now abandoned ‘stinginess is cool’ campaign. In furniture discounting has become endemic and there are a number of dedicated discount players such as Lutz Group’s Mömax or Roller. In clothing KIK and Takko are proving to be the best performers in the arena, while in homewares/general merchandise players such as Tedi and Kodi are beginning to flex their discounter muscles."

By 2012 one in every two Euros in German grocery retailing will be taken by the discounters 

2007 was an extremely tough year for retailers in Germany. The 2007 VAT hike from 16.0% to 19.0% curtailed growth for some retailers and sectors, but not for all. Retailers of big ticket items, primarily DIY and furniture, have borne the brunt of this, while sectors such as clothing, perfumeries and luxury proved to be quite insulated from its effects. With the exception of alcoholic drinks, grocers were largely unaffected as the VAT rate remained static for their key proposition.

Verdict Research predicts that by 2012 one in every two Euros in German grocery retailing will be taken by the discounters. Of Germany’s €131bn grocery market, the main players - Aldi, Lidl, Netto, Norma, Penny and Plus hold a combined share of 42%.  Aldi and Lidl are trading from an inherently strong position in the country, with the former double the size of the latter. However, Lidl is slowly starting to narrow this gap following its policy to introduce branded goods into its stores. With the sector leader Edeka’s might behind it, Plus will be invigorated and embark on an aggressive expansion policy once converted to the Netto fascia. However, Rewe’s Penny fascia now needs attention after recently suffering sluggish performances and Rewe’s loosing out on the Plus deal. No doubt Rewe will be determined not to let its rivals enjoy all the glory and will demonstrate its commitment to the discounter with a sizeable investment to ensure it benefits from the juicy growth prospects for this segment.

Wheels of the consolidation bandwagon have begun to turn

A direct result of extremely tough trading conditions is that the wheels of the consolidation bandwagon have begun to turn.The German grocery sector, in particular has been in a period of consolidation, which was kick started by Metro’s Wal-Mart acquisition in 2006. A race for Tengelmann’s Plus chain then ensued with Edeka coming out as the winner of that bid. Rewe, Germany’s number two grocer, responded by strengthening its supermarket chain through the purchase of Metro Group’s Extra stores.

Retailers in Germany’s DIY (Praktiker, Hagebau, Toom), furniture (Lutz, Möbel Höffner) and health and beauty sectors (Schlecker, Douglas Group) have followed suit, with M&A’s made by the key players in those sectors.

Looking ahead Verdict expects more retailers to jump on the consolidation bandwagon, especially in the furniture sector given that it is so fragmented and the pharmacy market, which is currently in a process of liberalisation. A possible merger between Germany’s leading department stores, Karstadt and Galeria Kaufhof, could also be on the cards, which would create a formidable German player in European department store retailing.

Despite the push towards consolidation there remain other significant opportunities for retailers in Germany

Verdict Research has identified three main themes which spell significant opportunities for retailers in Germany, firstly the development of a more profitable ‘price plus’ proposition; second, the liberalisation of the pharmacy market and thirdly the booming organic sector which has yet to reach its peak.

1.A move towards ‘price plus’, as polarisation continues. There are tentative signs of a move beyond the hegemony of price. One example of this is Aldi passing on price increases, a first in many years, forced on it by rising food prices and cost inflation. Metro Group’s electricals division has also started to innovate and move beyond the relentless focus on price and relaunched its advertising. However Verdict is sceptical as to how far retailers will be able to wrestle the German population’s entrenched fixation with price. In some sectors particularly department stores, clothing and health & beauty, moving to a price plus proposition seems to be an attractive option, especially as polarisation continues. Over recent years luxury and some segments of clothing have effectively proven that they can be insulated from vagaries of the broader economy. Naturally German retailers possessing strong service credentials will be able to make significant inroads in the future, but the issue of price will remain the overriding factor.

2.The prospect of pharmacy liberalization, forced on Germany by the EU, would create a massive opportunity for retailers, particularly drugstore chains and grocers. Should full scale liberalisation be introduced, then the sector can look forward to a number of years of hearty growth, especially against the backdrop of an ageing German demographic. As current health and convenience trends continue their path of convergence, there is potential for a raft of new formats to appear. Initiatives such as grocers creating dedicated health zones comprising a pharmacy, organic food and a health & wellness section could become a distinct reality if liberalisation takes place. The pharmacy market in Germany could also start to resemble the UK in future and Boots could provide a model for retailers in Germany. Indeed Alliance Boots are certain to be looking at the growth potential.

3.Finally, Germany’s green retailing sector is the most advanced in the EU, yet it still has massive potential for further growth, according to Verdict. "The trend towards health consciousness, the convergence of premium/organic ranges and convenience alongside environmental concerns offer potential for a lucrative revenue stream for players in the sector" adds Lucht.  Sales achieved by specialist organic grocers such as Basic and Alnatura reached €600m in 2007 and these retailers are performing strongly to the extent that Basic attracted the attentions of the Schwarz Gruppe, the owner of Lidl and Kaufland. While the attempted takeover had to be terminated in the face of public protests and a supplier backlash, the growth prospects for the sector on the whole remain buoyant