January 25, 2013

Migros revamps German Tegut superstores

Jörg Blunschi, CEO Migros Zurich (photo: Dominic Büttner)
Jörg Blunschi: "We've still got a lot to do"
Jörg Blunschi is obviously a man who likes a challenge. Otherwise, the CEO of the Zurich branch of Swiss consumer co-operative Migros, wouldn't have surprised the world by buying Tegut.
  
The acquisition of the struggling German superstore multiple for an undisclosed sum as per January 1 hasn't daunted Blunschi's optimism, however. The doughty manager is even looking to turn a profit at the loss-making regional chain by the end of 2014. 

In an exclusive interview with our newspaper Jörg Blunschi also hopes it will achieve a net margin of 2 per cent in a food retail culture dominated by hard discount.

At least the Swiss, not generally renowned for extravagant euphoria, have a road map for Tegut, but will it get them to the Promised Land?

A lot to prune

Blunschi wants to boost revenues and sales productivity at Fulda-based Tegut by broadening the customer base. This means fine-tuning the assortment, clarifying price structures, and pruning the store network to an optimum outlet size of around 1,500m²-2,200m².

Lebensmittel Zeitung understands that Migros has also retained management consultancy Batten & Company as advisors.

Organic and fresh produce specialist Tegut always had a loyal following, but some German customers saw it as expensive. Therefore, Swiss plans for a sharply defined price fighter range will be appreciated, although Migros' own "M-Budget" range would be too costly to employ in Germany.

Of course Migros' real trump card is its top-quality own label. German customers won't drive the extra mile to Tegut though just for a piece of particularly delicious Swiss chocolate; Migros will have to get the assortment mix right from one individual outlet to another.

Blunschi's plans to restructure the store base and to expand into richer catchment areas are more problematical. Store closures could tarnish Tegut's image as a social employer. Also, plans to enter prosperous cities in Baden-Württemberg  and Bavaria will take time and patience.

Internal resistance

It is believed that 51-year-old Jörg Blunschi had to overcome considerable resistance within the Migros federation (2012 revenues: 25bn Swiss francs) to make the Tegut acquisition.

A two-figure million euro sum has been earmarked for modernising the German stores, and insiders estimate that total investment in Tegut could reach €150m in the first few years.

At one stroke Migros Zurich has nearly quadrupled its store base and boosted annual net revenues by around €1.1bn. Blunschi's bold move north into neighbouring Germany has also created a new market for Migros' considerable own label manufacturing division.

As Argus-eyed German competitors watch his every move, let's hear what the man himself has to say.

INTERVIEW


Herr Blunschi, have you already found yourself a nice flat in Fulda?

No, most certainly not. Tegut is an independent company which doesn't need permanent supervision on site. We have already completed intensive preparations. We have named the top management and it has already started to work.

The concepts which we have worked on over the past months can now take effect.

Do you think you could live to regret buying Tegut?

No. Tegut is a company with a lot of potential. In Germany food will also gain in importance, and there are already signs of this. Look at the political developments in the Federal State of Baden-Württemberg.

Our company, which stands for values such as sustainability, regional assortments, and the responsible use of natural resources, can find a good home there.

But the Tegut concept hasn't been so successful recently; do you think it also made a loss in 2012?

I assume so.

When will the situation change?

I expect a profit next year. One should expect an ebit of 2 per cent from such a company.

How do you intend to achieve this?

Some measures have already been taken, but we still have quite a lot to do. Tegut should be run efficiently like Migros is.

What will you do differently?

In the past, twenty-odd people in top management made it difficult to define a clear direction and to make quick decisions. Everyone was a bit of a lone warrior. We have now considerably reduced the size of second-tier management, and top managers need to become team players.

I expect this from them because they will have to make and implement numerous strategic decisions over the coming weeks and months.

What will be your first steps?

I particularly miss a stringent marketing strategy. It won't be enough just to put Migros products on Tegut shelves. We must position them exactly and at the right price. This year we shall make considerable changes to the assortment and store base.

What are you also working at?

I think that a retailer should have a clear and completely distinguishable profile. I also think that the days of the big store and the very small store are over. The best Tegut stores I have seen were between 1,500m² and 2,200m².

They must have space for a service counter and a relatively small non-food area. The smaller the store, the more you have to adapt the assortment to its catchment area.

So when are we going to see the first revamped Tegut stores?

That could be in 2014. The last Tegut store opened in Mülheim in November, and that's the model we are putting our money on.

Will you prune the store base?

We will certainly not make a major cull. However, a relatively large number of rental contracts will expire over the next four or five years.

You mean those Tegut outlets run by independents?

Yes. They must be able to stand on their own feet; otherwise it doesn't make sense to invest there.

How many of the currently 300 Tegut stores will there still be in five years?

There will be fewer independents, but more branches will be run by us as a multiple. I can't give you a specific number for five years' time. However, we wouldn't have invested in Tegut, if we hadn't the intention to grow.

How much money are you currently investing?

A two-figure million sum.

Trade experts estimate that you will need a three-figure sum.

We have looked at more than 100 outlets and divided these according to their needs. These range from total refits to minor improvements.

This was the basis on which we calculated the two-figure million sum. Further investment will come from business generated by ongoing Tegut operations. Their ebitda is positive so they can invest themselves.

Why did Tegut neglect to do this sufficiently in the past?

Over the last few years, the former owner, Wolfgang Gutberlet, invested in Tegut's food manufacturing division, and you can only invest one euro once.

How did you finance the acquisition?

Migros Zurich has liquid assets in the general Migros cash pool. We are also taking advantage of the current low interest rates to finance a major part of the purchase price using long-term loans via the Migros co-operative federation.

Our balance sheet structures, with a proprietary interest of 75 per cent, allow us to take out loans without having to provide special security.

How about the nine other Migros co-operatives? Could they be interested in also participating in Tegut?

Migros Eastern Switzerland is currently considering whether to participate in the deal or not. Discussions are on-going. A delegation started talks the other day in Fulda.

Would it be sufficient if just Eastern Switzerland participated?

Yes. But it would be a good sign if several co-operatives were to participate in Tegut in order to enter new business areas which are no longer so open in Switzerland.

What will Tegut stand for in the future?

One shouldn't make any changes to our basic values, whether these be sustainability, the way we husband resources, or our high share of organics, because these are Tegut's assets. Herzberger and KFF production plants are also fantastic companies and real assets.

But you sold them!

Yes, but co-operation continues and has been contractually agreed. That said, one could have gained the impression recently that Tegut stores were driven by the company's manufacturing interests. We are going to change this. The first step will be the exclusion of the coffee shops.

What is Tegut lacking?

Every retailer needs a price-fighter brand. Up till now Tegut wasn't positioned clearly enough. Basic lines were hardly differentiated from medium-price ranges. This really confused customers. Such lines must be branded uniformly.

Will Migros' manufacturing division do this?

I see good chances for many products. The same applies to the premium segment where we have a very strong manufacturing arm.

What Migros own labels could you list at Tegut?

I think these would work best at price-fighter and premium level. I believe we need an attractive mix and not just organics.

Many people feel that Tegut is too expensive. What German rivals do you intend to compete with in the future?

I benchmark Tegut against Rewe and Edeka, but we must differentiate ourselves more clearly from store to store.

How much "Swissness" can Migros integrate into Tegut?

Probably more in the Stuttgart area than say in the Federal State of Thüringen, but I can't say yet. The further we get from the Swiss border, the more difficult it will become.

Do you intend to reduce the percentage of organic food in Tegut's assortment?

In terms of absolute figures, we want to retain the current share of organics. That said, Tegut hasn't achieved particularly high sales densities to date, and we want to change this.

How?

Assortments need to be changed carefully because we don't want to lose existing customers and want to win new ones.

Are you confident that Thomas Gutberlet, the son of Tegut's former owner, has understood your new message?

I'm happy that we have decided on Thomas Gutberlet as MD. He is the ideal person for preserving the character of Tegut.

To what extent will you involve yourself in the management?

One can't run a German company from Zurich, but I shall follow the process of converting Tegut from an owner-managed company to one which is part of a co-operative.

 
Related article in German: Lebensmittel Zeitung, no. 4, 25.01.2013 by Annette C. Müller & Andrea Wessel


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