August 4, 2016

BIM CFO talks retailing in post-coup Turkey

Haluk Dortluoğlu opens BIM subsidiary FILE (photo: BIM)
Confident in a crisis: Haluk Dortluoğlu masterminded BIM supermarket subsidiary FILE (photo: BIM)
After the failed coup d'état by disaffected members of the military on July 15, Turkey remains on edge with thousands of its citizens still in detention.

In the wake of terror attacks since March 2015 and tensions with Russia, the Turkish lira had already fallen by nearly 10 per cent against the euro and to a record low against the dollar.

As more rating agencies prepare to downgrade the republic's creditworthiness, international investors look on with a wary eye.

Despite this, Haluk Dortluoğlu, executive committee member and CFO of leading grocer BIM, clearly believes, that modern self-service retailers still have strong growth prospects in what has been a dynamic threshold economy.

BIM facade in Istanbul (photo: BIM)
A BIM discount store in Istanbul (photo: BIM)
Meanwhile, tourism, which accounts for around 6 per cent of GDP and whose revenues have declined by as much as a quarter since the beginning of the year, is in crisis.

This is one major reason why the Vienna Institute for International Economic Studies has reduced its growth estimate for gross domestic product this year from 4.1 to 2.8 per cent. Given that 70 per cent of GDP is consumer expenditure, any such figure is not without significance for the trade.

Strong fundamentals

These discouraging statistics belie some strong demographic fundamentals, however. As analyst Batuhan Karabekir at private bank Berenberg underlines in an excellent research note, Turkey's rapidly growing population of 78 million is among the youngest in the region with over two-thirds of citizens at working age (15 to 64).

A 30-per-cent hike in the national minimum wage at the beginning of last year is also gradually drip feeding into the consumer economy.

A BIM shopping scene in Istanbul (photo: BIM)
A shopping scene at a BIM store in Istanbul (photo: BIM)
According to Euromonitor, Turkish food retailing has grown by 2.5 per cent per annum from 2005 to 2015. PlanetRetail estimates that market sales will top €100bn this year.

The decade also saw the penetration of modern self-service retailing rise from 14 to 40 per cent, this remains well below western European levels.

And a situation where the top-five retailers account for only 18 per cent of the total market obviously promises considerable further consolidation.

Proximity shopping on a highly fragmented market

Discounters, who have seen their share of the grocery market increase from 1 to 13 per cent over the last ten years, and convenience retailers are in pole position to profit from the relentless modernisation and consolidation of Turkish retailing.

Berenberg points out that this is primarily the case because urban consumers are far more likely to live in blocks of flats (three out of five people) and much less likely to have a car (one in five) than their counterparts in Europe.

Customers therefore appreciate small local stores they can reach on foot, which explains why the average national store size is less than a fifth (65m²) of that in Germany (391m²).

Although the country's c. 100,000 traditional neighbourhood stores, known as bakkallar, remain popular, they cannot compete with the everyday low prices of modern discounters such as BIM, A101, and SOK Market who continue to expand hell-for-leather.

This partly explains the phenomenal success of BIM with a leading share of the discount segment (63 per cent) and national grocery market (8 per cent). Last year the Istanbul-based company posted sales of TRY17.4bn (€5.2bn) – nearly double those of its next-largest competitor, multi-format retailer Migros Ticaret.

The German question

Metro Group is the main German retail/wholesaler player in Turkey and ranks number five nationally in terms of sales, which PlanetRetail estimates at around €2.1bn this year. Since entering the market in 1990, Metro has opened 28 Cash & Carry and 38 "Media Markt" consumer electronics outlets.

The Dusseldorf-based company which intends to split in two halves next year has always stated that it regards Turkey as one of the six "strategically important countries" within its vast empire.

Commenting on quarterly results till the end of June on Tuesday, CFO Mark Frese called the market "pleasingly crisis-resistant" and that sales had been "pretty robust".

A company spokeswoman also confirmed "a continued increase" in like-for-like sales and that businesss operations had not been affected in any material way this summer.

The only other German retailer in the region, Rossmann, is still quite small. Since its start in Istanbul in 2010, Rossmann has opened 60 drugstores with a broad geographic spread. PlanetRetail predicts sales of around €82m this year, but the business is most probably not in the black yet.

Surprisingly, the venture has run independently of minority stakeholder Hutchison Whampoa, whose international retail arm AS Watson is also active in Turkey.

A company spokesman declined to comment on future investment plans.

Capital-light business model

Returning to BIM, how has this vibrant retailer achieved its impressive compound annual growth rate (26 per cent), ebitda margin (4.9 per cent) and Return on Capital Employed (46 per cent)?

The company's recipe for success is as easy to define as it is difficult to replicate. Capex requirements are low because 99 per cent of the stores are leased, very small (250m²-300m²) and in secondary locations that do not require car parks.

A no-frills store ambience reduces investment requirements even further, while efficient cost management and logistics make for big gross margins.

A BIM store scene in Istanbul (photo: BIM)
A BIM store scene in Istanbul (photo: BIM)
High negative working capital on an assortment averaging only 600 SKUs, combined with a broad private label offer (70 per cent of annual sales), are further guarantors of high profitability.

Self-financing growth, a strong net cash position as well as the absence of debt and foreign exchange exposure result in a robust balance sheet.

This has powered an aggressive rollout strategy that has created a local network of 5,385 stores as well as 310 outlets in Morocco and 182 in Egypt. Meanwhile, like-for-like growth is impressive at just under 10 per cent per annum.

BIM was founded in 1995 by Turkish entrepreneurs who were intense admirers of Aldi in Germany and who introduced the discount format to Turkey.

The company IPO-ed on the Istanbul bourse in 2005. Currently, three-quarters of the shares are free-float, with the co-founding Topbas family holding 24.4 per cent.

CFO of the Year

Haluk Dortluoğlu (44) is not only an accomplished corporate finance director who has been awarded "Best CFO" and "CFO of the Year" by various financial institutions over the last few years.

He has also accumulated considerable strategic management experience since he joined BIM from an international consultancy background in 2005.

He is also the creator and project leader of FILE, a new retail format in the Turkish supermarket sector. Launched in April 2015, FILE now has eleven price-aggressive outlets and promises a new growth story for parent company BIM Birlesik Magazalar AS (BIMAS).

"Business as usual"

Haluk Dortluoğlu, CFO BIM (photo: BIM)
Haluk Dortluoğlu (photo: BIM)
Mr Dortluoğlu, has the current political turmoil in Turkey caused BIM any problems with out-of-stocks?

We don't have any distribution or logistics problems at the moment and we don't expect any over the coming days and weeks, unless, of course, another extraordinary event takes place.

Some European retailers are concerned that local textiles and other non-food manufacturers may not be able to guarantee deliveries. Are these worries justified?

As the attempted coup failed, it didn't have any direct impact on business. Our suppliers haven't been affected by the events, and it is business as usual for them. I believe the situation is very much the same for other suppliers.

How have the political upheavals affected consumer sentiment? Are Turkish customers buying less?

It has only been a few weeks since the coup failed, so it is too early to assess its general effects. But growth rates in the retail sector had already slowed down over the last year.

There were many reasons for this, including a bad tourist season and the opening of far too many retail stores in relation to consumer demand. Regrettably, this trend still continues today.

Have consumer prices increased, and could inflation get out of control?

There are no signs that the current crisis will increase consumer price inflation which was 7.6 per cent at the end of June as against 7.2 per cent last year.

You must also remember that we are in a political rather than in an economic crisis and that our economy is not shrinking.

Would a discounter like BIM profit from any inflation scenario?

Turkish consumers differ here from European consumers. We saw this last in 2008 when discounters profited from the economic crisis in Europe because customers traded down. But this wasn't the case in Turkey where all local retailers were affected negatively. At the most, one could say discounters here were affected less than others.

To what extent have tourists been scared away by the political situation in Turkey, and will this hurt retail sales?

Tourism was already having a bad time here over the past year due to terror attacks and the crisis with Russia. Hotel accommodation prices have gone down sharply. The attempted coup has probably not worsened an already bad situation to any significant degree.

How has the political uncertainty in Turkey affected your investment plans?

We haven't changed our investment plans either at home or abroad and are keeping to our capex guidance of TRY700m (€210m). By the end of this year, we will have opened 600 new stores in Turkey and employed 3,500 new staff. We have also continued to open outlets in both Morocco and Egypt.

Currently numerous specialists are not allowed to leave Turkey. Will this affect your ability to travel abroad and attend, for instance, conferences, and will it be more difficult to recruit international management?

This is definitely not the case. I think the measures will only be temporary until the Turkish government gets the situation fully under control.

Any government in the world would have taken similar measures after such a coup attempt, and I believe that they will make the business environment in Turkey safer and more stable over the coming days.

Finally, one would not wish to close without expressing, regardless of politics, our respect and affection for the Turkish people…

Thank you for that. This is a difficult period for Turkey and its democratic institutions. I believe our country will emerge from this crisis with a stronger democracy.

The Turkish people have clearly shown their support for democracy, and this is an excellent guarantee against any possible anti-democratic movements in the future. The world's support for the elected government and democracy of Turkey is obviously very important at the moment.

Lebensmittel Zeitung with digital sister (photo: LZ)
Our German B2B newspaper, Lebensmittel Zeitung, in print & digital
Read in German: 'Händler bekennen sich trotz Krise zur Türkei' by international editor Mike Dawson & retail news desk manager Jan Mende as well as 'Rossmann wartet am Bosporus ab' by Jan Mende on page 10 of Lebensmittel Zeitung, no. 31, 05.08.2016

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