Top 20 CEE Grocery Retailers: Tesco slips while Russia drives growth

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1 Top 20 CEE Grocery Retailers: Tesco slips while Russia drives growth 23 July 2012 Miloš Ryba Senior Retail Analyst The 2011 Top 20 Central and Eastern European grocers saw a shake-up among the top retailers as Tesco and Rewe Group dropped ranking places, overhauled by Russia's Magnit and Portugal s Jerónimo Martins. Furthermore, the way development is progressing suggests that companies operating in Russia will lead the way in the Central Eastern European retail market for the foreseeable future. X5 Retail Group could become the largest retailer in CEE in the future.

2 Russia drives sales growth in Central and Eastern Europe The Eastern European grocery retail market has now outstripped Central Europe. Therefore developments in this region and especially in Russia - will have a profound impact on the leading players in our future Top 20 grocers rankings. As in 2010, growth in the CEE region was driven by retailers operating in Russia. Magnit s revenue grew by 40.4%, while X5 Retail Group s sales were up 31.5% (in euro terms). True, the sales were primarily driven by substantial store openings, but were also bolstered by positive like-for-like sales rises. Magnit has reported 11.1% like-for-like revenue growth, while X5 grew 6.0%. In contrast, the revenues of global players like Tesco and Metro Group respectively grew by 8.1% and contracted by 7.8%. The only large retailers in Central Europe to report double-digit revenue increases were Schwarz Group and Jerónimo Martins. The former grew by 17.5%, while the latter reported sales up by 20.5% in its single market of Poland. In addition, Jerónimo Martins Biedronka discount stores outperformed Russia s retailers in terms of like-for-like sales with a 13.4% surge. The overwhelming importance of the Russian retail market in the entire Central and Eastern European region can be best demonstrated by comparing the revenues generated by X5 - the Russian market leader - and Schwarz Group, the leader in Central Europe with operations in 12 countries. X5 Retail Group is likely to overhaul Schwarz Group s turnover in Central Europe in the next three years, with every chance of assuming Schwarz s second-place position by 2017.

3 Tesco down and Russia's Dixy Group up Tesco has acquired a franchised store network for the first time in CEE Zabka in the Czech Republic. This year saw Tesco drop out of the top five while Dixy Group, a new player in the ranking, made its debut in 16th position thanks to its acquisition of rival Victoria Group. However, Tesco s drop in the ranking should not be viewed as a sign of failure. In fact, Tesco has been doing well in Central Europe. It expanded significantly in the Czech Republic through its procuring of the Zabka convenience stores, maintained its programme of converting larger stores in Central Europe to its Extra format, trialled its e-commerce model in Prague and rolled out self-checkouts in all its countries of operation. Such investment will undoubtedly consolidate Tesco s position in its current markets. However, the UK-based retailer needs to expand into new markets if it is to recapture its top five position in the region as a whole.

4 Ongoing market consolidation Key market players made two huge moves in In Russia, X5 Retail Group acquired 660 Kopeika supermarkets to consolidate its position in Moscow and the Moscow region, while Belgium-based Delhaize Group purchased Delta M, the retail arm of Delta Holding in Serbia. This was Delhaize s largest move in Central Europe since its exit from the Czech Republic and Slovakia in The retailer has secured the position of clear market leader in Serbia, as well as gaining access to new markets like Bulgaria, Albania and Bosnia and Herzegovina. Thanks to this acquisition combined with its strong position in Greece, Delhaize Group has become one of the key grocers in the Balkans. On a much smaller scale by comparison, Slovenian Tus sold its Serbian business to Croatian Agrokor, while Slovenian Mercator completed a takeover of Pantomarket, market leader in Montenegro. A busy year in Balkan markets Indeed the Balkans proved to be the most vibrant market in In Greece, Aldi completed the sale of its business to Schwarz Group s Lidl and other competitors at the start of the year. The country s ongoing economic turmoil led to bankruptcy of Atlantic, once among the leading Greek retailers. The revenues of the market leader Carrefour Marinopoulos kept plummeting and Carrefour eventually called time on the joint venture agreement between itself and Marinopoulos. Last but not least, in Slovenia, Mercator's management withdrew its support for the company sale to Croatian rival Agrokor as a consortium of banks was trying to sell a 52.1% stake in the retailer, leading to the resignation of its entire management in March 2012.

5 Major trends for 2012: e-commerce, franchising and market consolidation Tesco is supplying online shoppers from four hypermarkets in Prague. The year 2012 will be a milestone for the launch and expansion of e-commerce banners by grocers like Tesco, Auchan, Leclerc, Mercator and X5 Retail Group. Tesco has recently rolled out its online banner in Prague and Warsaw with short term plans to expand into other large Polish cities. Meanwhile, Auchan is already online in Warsaw and is to revamp its Moscow e-commerce banner. In Russia, X5 Retail Group is planning to expand E5.ru outside Moscow. Franchising is likely to become a more common means of expansion as foreign retailers seek to develop their networks faster with minimum risk, whereas others will aim to sell underperforming divisions. Tesco undertook a new expansion strategy in CEE with its acquisition of Zabka-franchised stores in the Czech Republic, while Carrefour hopes to open 200 Carrefour Express stores in Poland in 2012 and COOP EURO in the Czech Republic aims to find a franchisee for its struggling supermarkets and neighbourhood stores. The Central and Eastern European retail market is likely to undergo further consolidation. We could see another big shift in the top of our rankings in the near future as some global players, faced with problems in their domestic markets, may decide to sell some operations or even exit from an emerging market altogether.

6 There seems to be plenty on offer. Metro Group will look for a buyer for its 110 Real hypermarkets in Russia, Ukraine, Romania, Poland and Turkey, while Carrefour may well divest from Poland. Carrefour s ex-partner in Greece, Marinopoulos, is looking for a partner to finance its businesses in Greece, Bulgaria, Cyprus and Albania. A potential investor for a hypermarket chain could be Auchan. It recently showed an interest in the Central European hypermarket sector in buying Delhaize s Cora hypermarkets in Hungary. Considering Auchan s strategy of developing City compact hypermarkets, Carrefour s assets would be a better fit than the large Real stores. Real could also be an attractive option for Walmart, which has been eyeing the region for several years. Indeed, Central Europe is not unknown territory for Walmart as its UK s Asda banner sources private label products from the region. Purchase of the Real network in Central and Eastern Europe which is intended to be sold as one package - would bring Walmart into Russia. This could well be the thing that interests Walmart most of all. Central and Eastern Europe: Top 20 Grocery Retailers, 2011e-2016f (EUR, mn) Change Rank Company Number of Outlets, 2011 Banner Sales, 2011* Food Retail Format Sales, 2011** Banner Sales, 2016 Same 1 Metro Group ,745 3,068 21,553 Metro Group s revenues dropped across the entire region and in all formats in The only exception was Russia where sales growth was driven by store expansion of Metro cash & carry and Media Markt banners. The company hopes to sell its Real hypermarkets to focus on its core cash & carry and electronics businesses. Schwarz Same 2 1,958 14,016 14,016 23,731 Group Schwarz Group continued the expansion of both its formats, especially Lidl discount stores in the Balkans. It completed the purchase of Plus stores in Romania and acquired some Aldi stores in Greece. The retailer is likely to continue its expansion drive, entering Lithuania and Serbia this year. X5 Retail Same 3 3,011 12,774 12,768 25,020 Group X5 s revenues growth in 2011 was considerably lower that its rival Magnit. Karusel hypermarkets are the retailer s big challenge. X5 is looking for a new hypermarket concept. It is likely to grow through takeovers of local players like Siberian Holiday Klassik. Same 4 Auchan 193 9,478 9,478 18,706 65% of Auchan s revenue in the region is generated in Russia. The retailer is going to roll out its Auchan City compact hypermarket across its markets. In addition, it plans to improve its e-commerce in Poland and Russia. Retail s presence may grow significantly in the next few years as Auchan may consolidate its market position through mergers and acquisitions. Up 5 Magnit 5,309 9,458 9,433 20,715 Magnit, the fastest growing grocer in Russia in terms of revenues opened a record

7 1,254 stores last year. It is going to focus on expansion of its price oriented supermarkets as well as Magnit Kosmetik drugstores. Down 6 Tesco 1,066 8,919 8,702 12,283 Tesco is among the top retailers in countries in which it operates (Czech Republic, Slovakia, Hungary and Poland). However, it is facing strong competition, especially in Poland and Hungary. E-commerce, which Tesco is going to expand across the region, may improve its market position. Jerónimo Up 7 1,916 6,259 6,241 11,970 Martins Biedronka is one of the fastest (a 13.4% like-for-like revenue growth in 2011) organically growing grocery chains in Central Europe. Apart from expansion of its discount format, the retailer may roll out its Hebe drugstores in the near future. Same 8 Carrefour 1,311 6,108 6,108 8,399 Carrefour s deteriorating financial situation in Greece led to termination of its JV contract with Marinopoulos. The retailer s presence in the region is likely to decline significantly in future as it aims to exit some of its emerging markets. Poland may be one of them. Down 9 Rewe Group 1,353 5,237 5,200 7,734 Czech Republic and Romania are Rewe s strongest markets. In other CEE countries Rewe does not have a significant role. Rewe Group s low investment in 2010 and 2011 did not help as Schwarz Group s Lidl has become a strong competitor for its Penny banner in the Balkans. Absence of a convenience store format or an e-commerce strategy is also to retailer s disadvantage. COOP Same 10 10,883 4,307 4,307 4,499 EURO COOP EURO is having tough times in the Czech Republic where it aims to convert underperforming stores to franchise models. Its local associations may help its market position in Hungary as the Hungarian government tend to protect domestic players. Same 11 CBA 4,915 3,544 3,544 4,467 CBA s recently-introduced multi-format strategy will help the retailer maintain its market position. Its role in the Hungarian retail market will be reinforced once it completes acquisition of Luis Delhaize s Profi discount stores and Match supermarkets. Same 12 Ahold 548 3,468 3,451 3,581 Ahold keeps strong market positions in the Baltics and its outlook has also improved in the Czech Republic. However, the company will have to bring some innovation into its strategy, such as e-commerce, in order to survive in the long term. Same 13 Mercator 1,586 3,247 2,685 4,164 Mercator s ongoing sale along with the replacement of top management play into the hands of foreign competitors like Schwarz Group, Agrokor and Delhaize Group. The retailer faces a tough test in its home market and lacks funds for quick expansion into new markets like Bulgaria. SPAR Same ,125 2,924 3,841 (Austria) SPAR (Austria) has focused on the development of small formats. It is testing a convenience store format Spar To Go which could later be introduced into other countries. Same 15 Agrokor 1,809 2,893 2,291 3,904 Like Mercator, Agrokor, which lacks funds for investment, faces strong competition from discounters in is home market and Delhaize Group in Serbia. Purchase of Mercator could help both retailers in a struggle with foreign players.

8 New 16 Dixy Group 1,118 2,845 2,845 6,514 Dixy Group is going to focus on organic expansion of its supermarkets and neighbourhood stores. The retailer is going to complete rebrand all Victoria stores as part of their integration into Dixy's operational structure. Delhaize Up ,817 2,543 4,946 Group Delhaize Group has become one of the largest grocers in the Balkans thanks to the acquisition of Serbian leader Delta M. Delhaize s strength of combining best practices from different countries will help it to consolidate its market position in the region. Down 18 Maxima 469 2,794 2,629 3,526 Maxima is the leading retailer in the Baltics. However, the company has expanded into Bulgaria and Poland. Good prospects in the Baltic retail market may help the retailer finance store development in its new markets. Same 19 Eurocash 786 2, ,151 Having acquired the wholesale arm (Tradis) of its rival Emperia Holding, Eurocash will go ahead with the synergy of business units, logistics and will renegotiate prices with suppliers using its massive purchasing power. Consequently, the company will be a much stronger rival for Metro Group s Makro cash & carry. Down 20 O'Key 71 2,616 2,616 5,477 O Key has been expanding outside its home market of St. Petersburg. New hypermarkets will be launched in the Urals and Siberia. In addition, the retailer plans to launch a price oriented supermarket under the brand Da! Note: e estimate; f forecast; * Banner Sales total sales (including VAT) of all banners owned or operated by the company. This figure includes full revenues from franchised operations and full revenues from partly-owned chains/stores; ** - Food Retail Format Sales total sales (including grocery and non-grocery) through food retail formats.. Source: Planet Retail Ltd - Source: Planet Retail