April 22, 2016

Schwarz Group is Europe's Mr Big Spender

Shirley Bassey (photo: By Nyctc7 (Own work) [Public domain], via Wikimedia Commons)
Will Shirley Bassey now shop at Lidl?
It is not known whether Dame Shirley Bassey is still looking for a big spender at the age of 79. But, if so, the lady can certainly find one with German retailer Schwarz-Gruppe (Schwarz Group) whose spending has now reached record levels. Last year, the owner of discount subsidiary Lidl and its XXL-sized brother Kaufland invested a whopping €5bn.

This impressive sum was essentially used to upgrade and expand the store base in Germany and Europe. That was considerably more cash than the annual investment of major rivals Edeka, Rewe and Metro Group put together. It also easily beats that of other national market leaders in Europe such as Carrefour in France, Ahold in the Netherlands, Migros in Switzerland or Tesco in the UK. 

Admittedly, the capital expenditure (capex) of US giant Walmart was more than twice as high last year (€10.2bn). But, if you put capex in relation to net revenues for both companies, then our slide rule gives Schwarz Group 6.3 per cent against only 2.4 per cent for Walmart. In fact, our thrifty Swabians topped the international league of all the grocery multiples we reviewed (cf. chart below).

Capex as a Percentage of Net Revenues

Schwarz Group (D): 6.3%
Migros (CH): 4.9%
Edeka Group (D): 3.4%
Rewe (D): 3.1%
Ahold (NL): 3.1%
Carrefour (F): 2.8%
Walmart (USA): 2.4%
Metro Group (D): 2.4%
Tesco (GB): 2.1%
Investment levels at Schwarz Group warrant even more attention when one considers their dramatic rise over the last few years. Whereas capex at both Walmart and, for instance, Tesco has declined, it has increased by €1bn per annum at the Neckarsulm-based company since business year 2012/13.

This startling trajectory is set to continue. Insiders estimate that Schwarz Group will up capex by a further €1bn in its current business year to the end of February 2017. This means that the retail giant, which posted net sales of more than €79bn last year, will have doubled annual investment to €6bn in only three years.

As the company is also on the verge of expanding into the United States in early 2018, it is exceedingly unlikely that capex levels will be declining any time soon.

A modern Lidl store near HQ in Verona (photo: Lidl)
Demanding: Lidl's strategy of trading up from a no-frills discounter to a price-aggressive supermarket operator has substantially increased capex requirements
Although the privately-run discounter has never sought a listing, such dynamism has not gone unnoticed on international capital markets. As Bruno Monteyne, senior analyst at Bernstein, rightly says: "Investment is clearly linked to the level of organic space growth: If you are still growing rapidly in space, that requires high levels of capex."

Probably there is no better indicator of the relative health of a company than the level and progression of its capex. At the very least, it reflects management's strong belief in the future.

A Kaufland hypermarket (photo: Kaufland)
Lidl's XXL brother: A Kaufland compact hypermarket
Capex allocation remains an art because all free cash flow is obviously finite. Many companies are happy if they can keep their investments in line with the depreciation charge. Others decide to spend available monies on new stores and systems, but are obliged to neglect their existing network, which risks losing customers as outlets become increasingly shabby.

So not all retailers are in the happy situation of Schwarz Group where they can upgrade and expand their store base at the same time.

Sounds like a healthy company? Maybe it's one Shirley should spend some time with...


Related article in German: By Mike Dawson in Lebensmittel Zeitung, no. 16, 22.04.2016


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