Schwarz Group challenges Tesco
With net sales of €74bn for the year to the end of February 2014, the Neckarsulm-based company looks set to push Tesco down soon to number three in the list of leading European food retailers and is already snapping at the unhappy UK retail giant’s heels.
If Schwarz Group continues to grow at its current giddy rate of 10 per cent per annum, the parent of "Lidl" discount stores and "Kaufland" superstores could soon challenge Carrefour to become Europe's largest retailer.
This dynamism needs to be put into context in order to be appreciated fully. Over the last two years alone, sales have jumped by €10bn which is the equivalent of creating a company the size of Coop Italia or the Co-operative Group from scratch.
Such an achievement is all the more astonishing given that the increase was essentially like-for-like and that a lot of smaller Lidl stores were closed during the period.
Schwarz Group, or Schwarz-Gruppe to give it its native handle, has already passed the 10,000-store mark, with Lidl making up the lion's share (€54bn) of consolidated annual revenues and Kaufland (€20bn) the rest.
The tremendous growth which made all this possible doesn’t seem to have strained the balance sheet. In fact, the positive development in like-for-likes has clearly had a favourable effect on group earnings, and the equity ratio is now around 35 per cent of total assets.
While European rivals Tesco, Carrefour and Metro have been trimming investment, Schwarz Group will be maintaining its high annual capex level of €4bn over the coming year. Both Phil Clarke at Tesco and Georges Plassat at Carrefour, who have virtually called a halt to Big Box expansion in the UK and France, will probably be surprised to learn that a large part of this investment has been earmarked for Kaufland’s 635 outlets in Germany.
In particular, funds will be channelled into the modernisation of stores in eastern Germany. “We quickly opened a lot of outlets there in the early 90’s after the wall came down, but they now need some sprucing up,” says Kaufland CEO Frank Lehmann.
Although more modern sites with better fresh produce departments will attract more customers, the real advantage for a superstore and compact hypermarket discounter like Kaufland are lower running costs via more efficient refrigeration technology etc.
This new store investment will obviously put even more pressure on competitors such as real,- whose parent company, Metro Group, has been obliged to tighten its belt.
Kaufland hunts abroad
Strict local Planning Acts mean, however, that 80 per cent of new store openings at Kaufland last year were outside Germany. The company already runs more than 500 superstores and hypermarkets in six European countries and is planning to enter Serbia.
Kaufland managers see Auchan as their main competitor in Europe. Rivalry has increased since the French giant bought nearly all of the eastern European store network of real,- last year making Auchan particularly strong in Poland and Rumania.
The main focus of capex will clearly therefore be on bricks & mortar over the coming years. Although Kaufland does plan to enter the online business at some stage, it is not a priority. “When we do it, we want to do it right,” seems to be the mood.
Schwarz Group CEO Klaus Gehrig wants to create more synergies between Kaufland and Lidl. These will include such areas as administration, the purchase of industrial equipment, and food manufacturing. Lidl, for instance, has its own factories for making chocolate, baked goods and mineral water while Kaufland runs a meat plant. Therefore they could easily deliver one another.
“But both companies’ main buying and sales functions will remain autonomous,” says Lidl’s new CEO Sven Seidel who will play a central role in coordinating these activities.
Clearly the heady pioneering days of “speed before efficiency” have now passed at Schwarz Group, and Klaus Gehrig is concentrating on structural efficiency. In this context, it is also significant that he now talks about “optimising” rather than widening the assortment.
So, Schwarz Group is not only big and burly, it also has a clear road map for future growth. Hallo, Mr. Clarke, are you still there? Podcast. Click arrow to listen to an audio version of the text:
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