Con­sol­i­da­tion, rise of dis­coun­ters shap­ing out­look for gro­cery market in SEE

Top 100 See - - See Top Industries - By Mi­lan Ca­kic, con­tribut­ing an­a­lyst at Euromon­i­tor In­ter­na­tional

The lu­cra­tive in­dus­try of re­tail­ing ser­vices in South­east Europe (SEE) is un­der­go­ing an im­por­tant tran­si­tion. The coun­tries are lag­ging be­hind more de­vel­oped West Euro­pean mar­kets in terms of gen­eral eco­nomic power as well as, more specif­i­cally, de­vel­op­ment of re­tail­ing in­dus­try. How­ever, since there are some im­por­tant dif­fer­ences be­tween the SEE coun­tries re­viewed here - Slove­nia, Croa­tia, Bos­nia and Herze­gov­ina, Ser­bia, Mace­do­nia, Ro­ma­nia and Bul­garia - it can be ar­gued that they in­di­vid­u­ally rep­re­sent var­i­ous stages in the de­vel­op­ment of the re­tail­ing land­scape. Namely, even though there is no doubt that all of these mar­kets are fol­low­ing the path of evo­lu­tion set by more de­vel­oped mar­kets, it is also clear that not all SEE coun­tries are cur­rently in the same phase of the more or less lin­ear de­vel­op­ment course they are on.

SEE na­tions have wit­nessed a dras­tic change in their gro­cery re­tail­ing in­dus­try since the be­gin­ning of the 1990s. To­day there is a strong con­sen­sus among most stake­hold­ers as well as ob­servers and re­searchers en­gaged in this en­tre­pre­neur­ial do­main that the SEE coun­tries are not likely to di­vert from the road trod­den by West Euro­pean coun­tries. All in all, it is ob­vi­ous that the mar­kets in ques­tion are see­ing a mod­erni­sa­tion of their gro­cery re­tail­ing land­scape.

Driv­ing forces be­hind changes in gro­cery re­tail­ing in SEE

There are three gen­eral and two rather spe­cific trends which are de­ci­sively in­flu­enc­ing the gro­cery re­tail­ing land­scape in SEE coun­tries. The most im­por­tant gen­eral trends are: market con­sol­i­da­tion, in­creas­ing share in over­all sales of pri­vate la­bel brands in vir­tu­ally all fast-mov­ing con­sumer goods (FMCG) cat­e­gories and ris­ing pop­u­lar­ity of dis­coun­ters as the gro­cer of choice for more and more con­sumers. A fur­ther two trends which should not be over­looked are the grow­ing pop­u­lar­ity of con­ve­nience stores and the fast de­vel­op­ment of in­ter­net re­tail­ing in these mar­kets.

Ac­cord­ing to Euromon­i­tor In­ter­na­tional data, the com­bined share of the top five gro­cers did not ex­ceed 55% in any of the SEE coun­tries ex­cept Slove­nia in 2013. Thus the lead­ing five gro­cery re­tail­ers grabbed only 22% of the market in Mace­do­nia in 2013, 32% in Bul­garia, 36% in Ro­ma­nia, 37% in Bos­nia and Herze­gov­ina, 40% in Ser­bia, and 55% in Croa­tia, with Slove­nia as the only coun­try with sub­stan­tially higher share, of 80%. How­ever, in 2008 these per­cent­ages were much lower still, more than ten per­cent­age points lower in ev­ery sin­gle coun­try, again with the ex­cep­tion of Slove­nia where the top five gro­cery re­tail­ers ac­tu­ally lost three per­cent­age points in the 2008-2013 pe­riod. For ex­am­ple, the top five gro­cers in Bul­garia ac­counted for only 23% of the market in 2008 and as low as 16% in Mace­do­nia.

The above-cited fig­ures un­am­bigu­ously show that market con­sol­i­da­tion is a very im­por­tant and cer­tainly very strong trend on the gro­cery re­tail­ing sec­tor in SEE with mas­sive po­ten­tial for trans­form­ing the mar­kets in the re­gion. This process is re­shap­ing the gro­cery re­tail­ing land­scape in the re­gion and the strong­est com­pa­nies are ac­quir­ing smaller ones, hence grow­ing in size as well as in strength. For ex­am­ple, in Ser­bia over the course of the last five years only, Del­haize Group took over Delta Maxi, sec­ond-ranked gro­cer Mer­ca­tor-S – the Ser­bian arm of Slove­nia's Mer­ca­tor - pur­chased peer Famil­ija and Croa­tia's Agrokor Group took over the Tus su­per­mar­kets.

Market con­sol­i­da­tion, spread of pri­vate la­bels and dis­coun­ters in fo­cus.

Cer­tainly the most im­por­tant de­vel­op­ment when it comes to market con­sol­i­da­tion, which is in­flu­enc­ing most of the SEE coun­tries, is the ac­qui­si­tion of Mer­ca­tor by Agrokor Group. The deal, which was in the cen­tre of at­ten­tion for quite a while, fi­nally ma­te­ri­al­ized in 2014. It will have more than vis­i­ble ef­fects on the mar­kets in the western parts of the SEE re­gion, pri­mar­ily in terms of market shares but also in terms of, for ex­am­ple, the vis­ual marketing and brand­ing of the lead­ing re­tail­ers and the shop­ping ex­pe­ri­ence in gen­eral. This will face other large re­tail­ers in these coun­tries with a su­per­strong com­peti­tor, as Mer­ca­tor and Agrokor are al­ready hold­ing some of the lead­ing five po­si­tions in these mar­kets. It can be con­cluded that market con­sol­i­da­tion is gain­ing mo­men­tum in the re­gion thanks to the mere fact that most of the SEE mar­kets simply have a no­tably un­der­de­vel­oped re­tail­ing in­dus­try with a lot of room for big play­ers to ma­neu­ver and take over smaller chains which are in great dan­ger of los­ing ground and go­ing bank­rupt.

The next big trend in gro­cery re­tail­ing in SEE mar­kets is the in­creas­ing share of pri­vate la­bel brands in most FMCG cat­e­gories. Some five or ten years ago - de­pend­ing on the coun­try, when pri­vate la­bels first started to ap­pear, peo­ple were some­what skep­ti­cal about prod­uct qual­ity. Even though these prod­ucts were some­times of­fered at con­sid­er­ably lower prices than branded prod­ucts, many con­sumers were re­luc­tant to aban­don branded prod­ucts and to even con­sider try­ing pri­vate la­bels. How­ever, this has changed with time due to two de­ci­sive fac­tors. Firstly, con­sumers have be­come in­creas­ingly aware that pri­vate la­bel brands are in many cases ac­tu­ally pro­duced by well-known and renowned, usu­ally do­mes­tic, com­pa­nies. On the other hand, re­tail­ers grad­u­ally started to of­fer more and more pri­vate la­bel prod­ucts in vir­tu­ally all FMCG cat­e­gories and these two fac­tors nat­u­rally led to the in­crease of their shares. How­ever, even though the share in over­all gro­cery sales of pri­vate la­bel prod­ucts is grow­ing in all SEE coun­tries, it is also quite ob­vi­ous that these coun­tries con­tinue to ex­hibit con­sid­er­able dif­fer­ences. Euromon­i­tor In­ter­na­tional's re­search has shown that Slove­nia is the ab­so­lute leader in terms of pri­vate la­bels' im­por­tance in this re­gion, with as much as 31% share of pri­vate la­bel prod­ucts within pa­per tis­sues and hy­giene in­dus­try and 22% share in soft drinks. At the other ex­treme, in Bos­nia and Herze­gov­ina the share of pri­vate la­bels in over­all sales of tis­sue and hy­giene prod­ucts is only 3.0%, while in con­sumer health, hot drinks and soft drinks in­dus­tries pri­vate la­bels are ei­ther non-ex­is­tent or neg­li­gi­ble in this coun­try. Of all SEE coun­tries be­sides Slove­nia, only Croa­tia has sig­nif­i­cant shares of pri­vate la­bel prod­ucts. For ex­am­ple, the share of pri­vate la­bel prod­ucts in Croa­tia is as high as 20% in pa­per tis­sues and hy­giene and 11% in hot drinks. As men­tioned, the market share of pri­vate la­bel prod­ucts is grow­ing across the SEE coun­tries and in vir­tu­ally all FMCG cat­e­gories. For ex­am­ple, the share of pri­vate la­bels in Ser­bia within pack­aged food in­dus­try has in­creased from less than 1.0% in 2008 to 3.0% in 2013. Over the same pe­riod, the share of pri­vate la­bels jumped from close to zero to 2.0% on the hot drinks market in Bul­garia, from 2.0% to 9.0% on the soft drinks market in Ro­ma­nia and from 6.0% to 10% on the beauty and per­sonal care market in Slove­nia.

Agrokor/Mer­ca­tor deal to have strong im­pact on re­tail land­scape.

A third gen­eral trend de­mon­strat­ing that SEE gro­cery re­tail­ing is start­ing to re­sem­ble more and more the gro­cery re­tail­ing land­scape in West Euro­pean is the in­creas­ing num­ber and grow­ing market share of dis­coun­ters. This trend is, of course, closely con­nected to the afore-men­tioned one as dis­coun­ters of­fer rel­a­tively more pri­vate la­bel prod­ucts than any other re­tail­ing chan­nel type. In Bos­nia and Herze­gov­ina there are no dis­coun­ters and in Ser­bia and Bul­garia the share of this chan­nel in over­all gro­cery re­tail­ing went up from zero in 2008 to 1.0% and 8.0% in 2013, re­spec­tively.

In Croa­tia dis­coun­ters have gained four per­cent­age points in the same pe­riod to reach 6.0%, and in Mace­do­nia the chan­nel in­creased its share by three per­cent­age points to 6.0% in 2013. Slove­nia is the most de­vel­oped coun­try in this sense as well with dis­coun­ters there hav­ing in­creased their share in gro­cery re­tail­ing from 9.0% in 2008 to 17% in 2013.

When it comes to the ex­pan­sion of dis­coun­ters, es­pe­cially in­ter­est­ing is the an­nounced en­try of Lidl on the Ser­bian market. Namely, Lidl's owner, Sch­warz Beteili­gungs GmbH, reg­is­tered a com­pany in Ser­bia in 2010 but is yet to launch oper­a­tions. Ac­cord­ing to the lat­est of­fi­cial press re­lease by the com­pany is­sued in the be­gin­ning of 2014, it has al­ready pur­chased land in sev­eral Ser­bian cities where it is plan­ning to build su­per­mar­kets and is plan­ning to open some fif­teen stores si­mul­ta­ne­ously. This de­vel­op­ment, which will prob­a­bly take place dur­ing 2015 , is ex­pected to have a rather notable im­pact on the Ser­bian re­tail­ing market. Fur­ther­more, it will prove that the dis­count­ing chan­nel is in­deed grow­ing in pop­u­lar­ity in the SEE coun­tries.

There are a fur­ther two in­ter­est­ing trends in gro­cery re­tail­ing in SEE which are some­what spe­cific to the re­gion. The first one is the in­creas­ing pop­u­lar­ity of con­ve­nience stores. This chan­nel has in­creased its share within gro­cery re­tail­ing from 5.0% in 2008 to 10% in 2013 in Bos­nia in Herze­gov­ina, and from 6.0% to 8.0% in Ser­bia. The trend is par­tic­u­larly vis­i­ble in these two coun­tries due to the still very high share of in­de­pen­dent small gro­cers there. As tra­di­tional re­tail­ers lose market share, con­ve­nience stores are win­ning over con­sumers who are of­ten re­luc­tant to com­mute to the city out­skirts where most large mod­ern re­tail cen­ters are lo­cated and choose con­ve­nience stores over in­de­pen­dent small gro­cers be­cause of their su­pe­ri­or­ity in terms of prod­uct range and pric­ing.

In­ter­net re­tail­ing in SEE coun­tries is grow­ing in lock­step with the in­crease in the over­all num­ber of in­ter­net users in the re­gion. Thus the share of in­ter­net re­tail­ing within over­all re­tail­ing has in­creased from 1.3% in 2008 to 2.3% in 2013 in Slove­nia, from 1.2% to 1.8% in Ro­ma­nia, from 0.4% to 0.7% in Croa­tia and from 0.2% to 0.6% in Ser­bia, all in the same pe­riod. Most of this growth cer­tainly comes from the on-line pur­chase of non-gro­cery prod­ucts but in the last sev­eral years, a strong trend of gro­cers in­creas­ing their on­line of­fer­ings is also vis­i­ble. The lead­ing gro­cery re­tail­ers are quick to pick up on the lat­est trend of con­sumers start­ing to pur­chase gro­ceries via the in­ter­net and a point can be made that SEE coun­tries are not as far be­hind West Euro­pean coun­tries in this sense as is the case when it comes to other trends. In other words, in­ter­net re­tail­ing of gro­cery prod­ucts in SEE will de­velop more or less si­mul­ta­ne­ously with the more de­vel­oped coun­tries.

Euromon­i­tor In­ter­na­tional's data in­di­cate that all of the trends out­lined above are ex­pected to con­tinue in­flu­enc­ing and trans­form­ing the gro­cery re­tail­ing land­scape in SEE coun­tries. The shares of the top five re­tail­ers and pri­vate la­bel brands are cer­tainly ex­pected to keep ris­ing over the next five years in al­most all coun­tries in the re­gion. Fur­ther­more, the im­por­tance of dis­coun­ters is also fore­cast to grow. For in­stance, this chan­nel is ex­pected to ac­count for 12% of gro­cery sales in Bul­garia by 2018, which is a four per­cent­age points in­crease com­pared to 2013, while in the same pe­riod dis­coun­ters will gain three per­cent­age points in both Croa­tia and Slove­nia to reach 9.0% and 20%, re­spec­tively.

The fol­low­ing five years are also bound to be very in­ter­est­ing in terms of large in­ter­na­tional com­pa­nies en­ter­ing new mar­kets, but some sig­nif­i­cant with­drawals might also oc­cur. Most SEE mar­kets are fairly un­der­de­vel­oped and there is a lot of room for new com­pa­nies to en­ter sev­eral mar­kets. It was al­ready men­tioned that Sch­warz Beteili­gungs GmbH is ex­pected to en­ter Ser­bia but other big chains such as Billa, Car­refour, Aldi and maybe even Tesco may turn their at­ten­tion to these coun­tries as well. How­ever, we wit­nessed a ma­jor with­drawal as well. Namely, Del­haize Group SA sold all of its out­lets in Bos­nia and Herze­gov­ina and Bul­garia in the be­gin­ning of 2014, a year af­ter the com­pany ex­ited Al­ba­nia and Mon­tene­gro. For now, the com­pany is adamant it has no plans to with­draw from Ser­bia where it cur­rently holds the lead­ing po­si­tion. How­ever, this should be taken with a grain of salt, es­pe­cially con­sid­er­ing that af­ter the ac­qui­si­tion of Mer­ca­tor, Agrokor will take over the top po­si­tion in Ser­bia.

As has al­ready been sug­gested, the SEE coun­tries rep­re­sent dif­fer­ent stages in the mod­er­nis ation of gro­cery re­tail­ing. Slove­nia is ob­vi­ously in the fi­nal stages of this process and its gro­cery re­tail­ing land­scape is closer to Cen­tral Euro­pean or even West Euro­pean mar­kets than it is to SEE coun­tries. Croa­tia is first in line af­ter Slove­nia, with many in­di­ca­tors which bring this coun­try closer and closer to the more de­vel­oped mar­kets. On the other hand, Bos­nia and Herze­gov­ina, Mace­do­nia and Ser­bia have a long way to go be­fore they catch up. Fi­nally, Ro­ma­nia and Bul­garia are some­where in the mid­dle. There is no doubt that the coun­tries which are cur­rently in the early stages of the mod­ern­iza­tion process will ac­cel­er­ate their de­vel­op­ment over the forth­com­ing years, and this will slowly di­min­ish the ex­ist­ing dif­fer­ences be­tween the gro­cery re­tail­ing mar­kets in SEE.

Most SEE gro­cery mar­kets of­fer room for M&As.

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