Talk with Dansk Supermarked CEO Jensen
Erling Jensen: "We are one big family"
However, it is well-worth the effort if you are going to meet Erling (EJ) Jensen at the end of your travels.
Jensen (61) is the soft-spoken managing director of Dansk Supermarked.
The company's Netto discount stores rival those of Aldi and Lidl in the UK and – somewhat cheekily – also in Germany, the motherland of hard discount.
At the modern corporate head office of this low-profile operation everything exudes the easy-going perfection which the Danes excel at.
Perhaps this serenity is also due to the fact that Dansk Supermarked, with annual net revenues last year of €7.8bn, is organised as a trust within the A.P. Møller-Maersk shipping-to-oil conglomerate.
Thus, Dansk Supermarked doesn't have to plan for the short-term, and Erling Jensen can take a broad strategic view of how to expand Netto in western, eastern and northern Europe. Rivals please take note.
Mr. Jensen, Ahold has long wished to expand on the Scandinavian market beyond its cooperation with ICA. Are you now learning Dutch?
No. Ahold and Dansk Supermarked are merely members of the same European buying and marketing organisation AMS-Sourcing.
But only a few years ago there were frequent rumours in the Danish media about foreign retailers wanting to enter your country, and almost every second day Ahold was mentioned?
There have never been concrete discussions about this matter with external people.
Foreigners, however, are no stranger to your small home market. It was Aldi which created the discount segment in Denmark in 1977…
No, in fact we opened the first discount store in Denmark in 1976 under the “Bonus” banner which was a forerunner of Netto.
Why then did you close Bonus?
It wasn’t right at the time for the Danish market, and we were too impatient.
But then Aldi arrived…
They made a very slow start, and it took them several years to make a profit. Our dilemma was that Aldi in those days offered some lower-quality products, so it was difficult for us to reduce our prices to their level.
Therefore, we had to decide whether to compromise on product quality or to start a new discount concept. The result was the creation of Netto in 1981.
Where do you see Netto’s main competitive advantage over Aldi today?
Aldi runs many German own label products, whereas Netto’s own label share of sales is only around 35 per cent of sales, and it stocks many Danish products.
Many Danish consumers don’t want to buy German toothpaste, coffee or beer. We therefore cater more to local tastes and preferences.
But surely Aldi has adapted its assortment to the local market?
They go in phases. Originally, they offered very many German products. Then, they introduced more Danish products, then, they changed back again. Recently, they have started to reintroduce a small number of Danish products.
Doesn’t an own label share of 35 per cent make Netto a soft discounter?
We don’t call ourselves a discounter in Denmark and market ourselves as “your neighbourhood store”. However, we operate as a hard discounter rather than a soft discounter.
We have a very small assortment of around 1,000 SKUs at EDLP level, and we also have around 200 to 250 “spot lines” on special offer every week. These include many high-quality products as well as very creative non-food lines.
What do you mean then by “neighbourhood store”? That sounds more like convenience?
No, our formula is: we act like a hard discounter, but place our stores in neighbourhood areas.
To what extent have you felt the pressure from Lidl since it entered Denmark in 2005?
There is so much daily competition on the market that one competitor more or less scarcely makes an impact.
Whether Aldi, Lidl, Coop Norden’s “Logo Fakta” or Reitan Gruppen’s “Rema 1000”, all players wish to expand strongly. Isn’t the air getting a little thin on such a small market as Denmark?
No. You have to remember that we are playing on home ground. As the largest retailer in Denmark we are in a good position. We have the strongest retail brands with the highest recognition level among Danish consumers.
In Denmark consumers expect to receive special offer leaflets every week. On average they receive 20 to 30 per week, and our flyers have the highest customer retention rate.
So the Danish market is very price-oriented?
Price and quality-oriented. Nearly all retailers in Denmark work on a high-low basis rather than on an EDLP one.
Your retail portfolio in Denmark is broad, why did you choose hard discount to spearhead foreign expansion to Germany and the UK in 1990?
There are two main reasons. A hard discount format is relatively simple to export. It has a relatively small number of lines; and the stores are small and need less investment; distribution and logistics requirements are less complicated.
Hypermarkets, by contrast, require many local products and a large non-food share.
Isn’t operating a hard discount format in Germany a bit like carrying coals to Newcastle?
In Germany we saw a good chance in the eastern German Federal State of Mecklenburg-Pomerania. In my opinion, it is not important how many stores there are in an existing market place, but whether one can make a difference.
Where then do you see your USP in a country of discounters?
We started in the eastern region of the former German Democratic Republic with a lot of local products. We were the only retailers to do so, and we highlighted them with a red tag as a marketing tool.
This was a big success because local consumers were already familiar with the taste and quality of the products concerned.
But very soon afterwards all Germany’s hard discount giants piled into the region?
We were and are confident that we have the right concept and that our operation is clearly differentiated in the customer’s mind.
Why should a German consumer shop with you when there is an Aldi store on the right and a Lidl on the left?
Everyone follows each other on prices, they are very similar. We offer a better buying experience because of our good customer service, product quality and our many spot lines.
Our stores also have a pleasant ambience; store colours are warm and the atmosphere is good. Our employees are among the most committed and best-trained in the world.
German retailers are not generally considered world-class staff motivators. How are you different?
By running our business in such a way that everyone knows exactly what he or she is expected to do. We also provide our staff with extensive information about the business.
In fact, if you ask our employees who run the stores, they are very close to saying “it’s our store”. They feel that they are members of a team, and they know exactly how their store is performing on a local level. We are one big family.
There are now two discount operations running the "Netto" banner in Germany: your 75:25 per cent joint-venture with German retail giant Edeka, Netto Supermarkt GmbH (Stavenhagen), and Edeka's own discount format Netto Marken-Discount. Don't you think this confuses the German consumer, and what will happen when distribution territories begin to overlap in a major way?
We are joint-venture partners, and Edeka has its Marken-Discount mainly in the south of Germany.
In the coming years, however, there will be an increasing amount of overlap. The name is the same, but there is a big difference in store colours, and Edeka stress “Marken-Discount”, i.e. brand discounts, in their marketing.
Of course, there may be some minor confusion, but I don’t see a major problem.
So, it isn’t problematical to have a joint-venture partner who is also a competitor?
No, we are very satisfied with Edeka as a joint-venture partner. We could have gone it alone, but we preferred to have a local connection with one of the major players because Germany is a very large market and we are not a big player.
To what extent do you practice joint-buying?
It’s a possibility on a voluntary basis as we did with Spar in the past. We only started with Edeka in 2007. We are good friends with them, and we have known each other for several years via the European buying organisation AMS.
This was why we asked them to joint-venture with us.
Aren’t pan-European buying associations in reality little more than talking shops?
AMS only has only a few members, i.e., less than ten. Whenever a project is started, the first question asked of all members is: “Are you in, or are you out?” Then, when they are in, everything tends to move very fast.
We don’t only measure improved buying terms, we also measure the savings gained. We also work on a product basis, line by line, and we don’t buy whole categories.
Do you believe that you have the size and the scale to compete with the likes of Aldi and Lidl on a pan-European basis?
This is the difference between our mindset and those of many of our competitors. We are not thinking of trying to buy anyone else. We simply concentrate on doing things well.
Why didn’t you look for a joint-venture partner when you entered the UK?
At the time, the hard discount format was so unknown in the UK that nobody would have been interested. Local retailers were more interested in killing a newcomer than supporting it.
At first, it was very difficult even to find suppliers because they were afraid of annoying the major high street retailers. So we had to buy from cash & carry.
Why do you plan massive expansion in the UK?
After over ten years in the UK, we found that we were earning money, but that we were still too small, so we decided to shift up a gear, but “massive” is the wrong word. That sounds like 200 stores per year in each country where we are active.
Certainly, we shall try and double or triple our expansion rate in order to get local economies of scale. We also need to be larger in the eyes of both suppliers and customers. However, we shall only expand at a rate where we are sure that the stores we open are good ones.
The UK has traditionally been a value-added market where consumers have long shown relatively little interest in hard discount. Are you really sure you are on the right market?
Yes, I’m certain we are. Maybe in the UK we should try to become even more of a neighbourhood store than in Denmark.
So you might become softer?
No, because when you become softer, you sit between two chairs and lose focus. We have to be true to our concept, which is essentially hard discount. However, one can be a hard discounter and still be a friendly neighbourhood store.
Among European retailers you are a middleweight rather than a heavyweight. Why then have you not concentrated on just one foreign market?
Obviously, we should prefer to have a reasonable size in five foreign countries rather than to be very small in many countries.
To date, we simply seized the opportunities we saw, i.e., in eastern Germany, the Greater Manchester and Greater Leeds regions, Sweden as well as in western Poland and the Ukraine.
Does that mean that you won’t be expanding into any other markets?
No, I am sure that we shall at some stage, but step one for us now is to work very hard in those five countries to ensure that we achieve a reasonable size. During that period, we shall keep our eyes open for any other opportunities which might arise.
As more and more international retailers pile into Poland, what attraction does the market offer a hard discounter?
We did good business there right from the beginning. We obtained critical mass, i.e., broke even very quickly because cost levels are very low regarding staff wages, sites etc. Sweden, by contrast, is a relatively high-cost market.
So in less developed countries we break even in around two to three years and in more developed ones it takes around six to eight years.
But haven’t commercial real estate prices rocketed in Poland since 1990?
Of course prices have risen, but the increases have been quite normal, at least as far as our small stand-alone locations are concerned. We are currently expanding our store network to the south.
How would you characterise the Polish consumer?
Their attitudes are changing fast. However, the main pattern of daily shopping is still similar to that in Denmark 20 to 30 years ago when one went shopping several times a day with a small basket. So we have a lot of customers, but a relatively small average spend.
Polish consumers are also very local-minded, so we stock a high percentage of local products. We don’t try to force them to buy international products as many of our competitors do. We build our assortment around local consumer preferences.
Why has the Swedish market proved so hard for you? Could you exit the country now that you are also faced with Lidl?
Sweden has only been as hard as we expected. We knew before we entered the market that we would make losses for the first couple of years, and we duly budgeted for this. We are confident that we shall be able to break even this year.
Could you tell us a little about the history of Dansk Supermarked Gruppen?
About 100 years ago, our founder Ferdinand Salling opened a home textiles store in Aarhus. He continued to expand the business and slowly developed it into a department store. Later, his son, Herman Salling, entered the company and became a joint-partner.
In the late 50s, Herman Salling saw the first “double supermarket”, i.e., combining both food and non-food, in the USA. So, in 1960, he opened Føtex, i.e., Denmark's first double supermarket.
Which is why you are still strong in non-food today?
Yes, this is the big difference between us and many other retailers. We are a non-food retailer who diversified into food. All our competitors are food people who are trying to expand into non-food.
That is why we have a very high non-food share at Netto, Bilka and Føtex . If you take our hypermarkets, 50 per cent of the turnover is non-food, which is very high.
You represent a very low-profile organisation, may we use this occasion to ask about your corporate structure?
In the mid-60s, the company expanded particularly rapidly so Herman Salling looked around for an investor. Eventually, he came to an agreement with Mr. Møller of Maersk Line, whereby his new partner took a 50 per cent stake in the company.
Originally Møller were big in shipping, today they are also very big in North Sea oil, logistics etc. Since then, ownership has changed and today A.P. Møller-Maersk has a two-thirds stake in the company and F. Salling the remaining third.
Today's company is not in private ownership, however. Each holding is owned by a foundation, i.e., the F. Salling and the A.P. Møller foundations.
Does this hinder or help Dansk Supermarked?
It's good for us because we can concentrate unhindered on daily operations while remaining anchored in a very big group and not having to worry about takeovers etc. The A.P. Møller group are very professional and have seats on our board.
Which is why, unlike many public limited companies, you don't need to play up your results to attract shareholders?
Very often, we try to colour our results down rather than up. Profits are mainly ploughed back into the company in order to ensure that we have the muscle to expand. Our annual report bares witness to the strength of our cash-flow and the solidity of our balance sheet.
Related article in German: Interview by Mike Dawson in Lebensmittel Zeitung, no. 25, 22.06.2007