June 29, 2007

Talk with Colruyt Chairman Jef Colruyt

Jef Colruyt, CEO Colruyt (photo: Reinhard Rosendahl)
Jef Colruyt: "Big retailers don't always have small prices"
Founder-son Jef Colruyt is so shy and self-effacing that one could almost forget that he has a very exciting turnaround story to tell. The offices of the quietly spoken, 50-year-old chairman and director at Colruyt headquarters in Halle are so modest and functional that one wonders if one has not wandered into the porter's lodge by mistake.

In fact, price-aggressive supermarket operator
Colruyt is the comeback story of Belgian retailing. After international discount giant Aldi entered the tiny market in the mid-70s, the family-run company began to lose its footing. When fellow German discounter Lidl and French hypermarket heavyweight Carrefour followed, Colruyt looked positively punch-drunk.

It was essentially Jef Colruyt who got the company off the ropes to make it a local hero in Europe. Now things are looking up again. In fact, the company posted 2006/07 revenues of €6.3bn. How did he do it, and where does he go from here?

INTERVIEW


Mr. Colruyt, you adapt all your local prices to those of the competition, but this means that head office has to make 4.5m price changes a year. Why make your own life so difficult?


We want to offer our customers the lowest prices wherever they shop, but we know that they don't drive 50 kilometres to do their shopping, but a maximum of 10 to 20 kilometres. Price changes on a national basis would mean having to lower our prices unnecessarily everywhere.

How do you implement your price changes?

Price changes are processed overnight and relayed to our checkouts. The next day price tags are printed centrally and delivered to the stores in our lorries or are printed in the stores. A new label is put on each line manually.

How can you be cheaper than Aldi?

It's simple; you just lower your margin on their 800 lines and try to raise the prices on the rest of your assortment. We are the cheapest operator in Belgium. Our prices are about 4 per cent less than Aldi’s and up to 17 per cent cheaper than some of our supermarket competitors.

How can you be cheaper than Aldi, when you are only a middle-weight in European retailing and won't always get the best buying terms and conditions?

Big doesn't always mean a better price. Sometimes much smaller supermarkets than us obtain far better prices because they have better relationships with local suppliers and profit from their greater speed and agility.

Sometimes they grow faster, which pleases suppliers who want to invest in a growth story.

But surely volume counts for something?

No, not always, it depends on who is the best negotiator, who has the best relationship with the supplier, and on whom the supplier believes will give him the longest term business.

Also: who has the best buying organisation? Will the supplier have to deal with hundreds of different buyers, or just one? We have around 45.

What made Colruyt leave Europartners and join Coopernic in February 2006?

We were convinced in only half an hour by Leclerc, who had already conducted talks with Rewe Group, Coop Italia and Coop Schweiz. For us, as a small retailer in a small country, it is great to key into these large volumes.

How is the cooperation progressing?

Well and increasing. The negotiations are on-top and on an opportunist, line-by-line basis. First of all, the buyers of the different companies have to understand each other.

We have started with bulk products such as orange juice because non-food is often more difficult because many of the specifications differ from country to country depending on local laws and customer preference.

Roughly what percentage of sales do your own labels currently achieve, and do you wish to grow this?

Currently our own label share is slightly over 20 per cent. We do not necessarily wish to expand this; it depends on what we make on the national brands.

How do you achieve sales productivity in your Colruyt stores of €15,000/m² and a group ebitda margin of 8 per cent?

We have a lower gross margin than the supermarkets and a higher gross margin than the discounters. We own all our stores, land and buildings so our rent costs are minimal. Our personnel costs are about 4 per cent lower than those of the average supermarket.

Our distribution costs are around 0.5 per cent lower than at other retailers. All these points add up.

When Aldi entered Belgium wasn't it long-term your death-knell?

No. We underestimated Aldi in 1982/83 because we didn’t think them right for the Belgian market. Then we had some financial problems and almost went broke in 1985.

Was this all due to Aldi?

No. At the time we had been growing very fast at 15-16 per cent per year and were tight on cash. We also had continuous personnel shortages, which were exacerbated by union problems. So we went from plus 16 per cent to zero per cent in only a couple of months.

How did you fix the problem?

We decided to make a huge jump and fire 600 staff within a couple of months. We replaced our punch-card system with barcodes and increased our IT spend to its current level of around 2 per cent of sales.

We also decided to enlarge our assortment and sell cheaper than Aldi on every product.

Which Aldi accepted?

No, not without a fight. We continually lowered our prices and never gave up until everyone seemed to accept the status quo on the market.

Is it true that Colruyt is prepared to sell at below cost price?

No, it's illegal in Belgium.

Have you felt the impact of Lidl's arrival?

A little, but they are simply an extra competitor.

But haven't they contributed to increasing the prices of sites?

Since 2006, yes, for both land and buildings.

Is it true that you buy old schools, pharmacies, garages etc. in order to obtain sites? Surely this gives you a very heterogeneous store base, which impedes systematisation and economies of scale?

We minimise any negative effects by organising well, having good IT and good people. If a building doesn’t suit our purposes, we can always pull it down, but at least we have the site.

Sounds like your corporate culture is very flexible?

Flexibility is a Belgian trait. We are creative and try to find a solution whatever the situation or system is. Someone else determines the rules, so you have to work within them, and bend them a little bit to your own advantage.

Do you have a benchmark ?

Not really, but, if it was anyone, it would be Wal-Mart. We feel strong affinity with the way they think.

You invest around €150m in your business per year. Is that enough compared with your big European rivals?

The sum is more than enough for what we need, i.e., to increase sales on a non-adjusted basis by 8 to 10 per cent a year.

How do you wish to achieve this?

We expand the square footage of our store network by more than 4 per cent a year. Then there is inflation, and then we gain market share of around 2 to 3 per cent per year.

What market share do you think you will be able to achieve in Belgium longer-term?

We believe that we can reach 30 to 32 per cent within the next 10 to 12 years. Every year we open around 4 to 6 "Colruyt" stores, 7 to 10 "Okay" stores, two “Dreamland” stores, one “Dreambaby” store and 8 to 10 “Spar” outlets.

Do you exclude growing by accquisition?

A couple of years ago we bought part of our competitor Laurus. Acquisitions can be successful, if they can be integrated culturally. If, however, an acquisition is too big, you can choke on it. There are numerous examples in the world, example Daimler-Chrysler.

How about further expansion abroad?

We are already in France where we made a small acquisition. We are examining Holland, but it isn’t an easy market. There is a bigger difference between Belgium and Holland in terms of living and working than between Belgium and France.

Would you ever consider entering the German market?

Yes, why not? But not for a while. If we did, it would be with our own stores, if possible, if not via an acquisition or joint-venture, but these would have to fit culturally.

What do you look for when deciding on whether to enter a foreign market or not?

We look for long-term growth and the opportunity of the moment. Also our people must be willing to do it. For instance, not a lot of Belgians want to work in Germany, they prefer Spain!

Is the need to expand abroad dictated by the lack of growth potential on the Belgian market?

We see further growth in Belgium for at least another ten years in Belgium, so we could open another 50 Colruyt stores, more than 100 “Okay” stores, and 20 to 25 “Dreamland” stores.

In addition, we have projects in France. So we don’t need any more bread on the table at the moment.

If you made a major investment outside Belgium, would you joint-venture with other capital partners?

We don’t exclude a partnership, if we were making a major acquisition, but we have around €400m in cash and no debt, so we could easily raise €1bn. However, one other option would be to use this money to buy back our shares and go private in order to regain total control.

What are the current ownership structures at Colruyt?

We are a publicly-quoted company governed on a one-share-one-vote basis. 3 per cent of our shares are owned by our staff, 45 per cent by our 120 family members, 5 per cent by the investment company Sofina, the rest is broadly distributed.

Aren’t you worried about Carrefour offering a one-stop shopping experience in its hypermarkets in a way which your stores can’t?

We don’t want to offer such large ranges because that is not our metier. Some customers like hypermarkets, but others don't. We feel that increasing traffic problems are making hypermarkets less-and-less attractive.

Why drive 40 minutes in bad traffic, pay petrol for 25 kilometres and get fined for speeding twice on the way?

Is this why you diversified into neighbourhood stores in the 90s?

Yes. Firstly, it was due to stricter Planning Acts in Germany and, secondly, due to increased traffic on the roads.

Why did you also diversify into "Dreamland" and "Babyland" stores?

It wasn’t because we didn't want to sell non-food in Colruyt stores, we simply didn’t have the space. So we started a catalogue business and made the Dreamland acquisition.

Our Babyland stores were started three years ago because I felt that there was a short-term market for baby products in Belgium. There are a lot of independent players in the segment, but the rest of the market is open.

 
Related article in German: Interview by Mike Dawson & Sabine Rössing in Lebensmittel Zeitung, no. 26, 29.06.07


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