Talk with Portuguese retailer Jerónimo Martins
The kind eyes and pleasant facial expression of the 76-year-old Chairman of leading Portuguese retailer Jerónimo Martins light up when talking about the well-being of his staff. This is clearly reciprocated. From secretaries and shop staff to top management, employees assume an almost transcendent look at the mere mention of his name.
In today's world anything patrician is, given the lessons of history, understandably regarded with suspicion. But, if paternalism was dos Santos, then a lot more people would vote for it. Like most of the better things in life, this exceptional family company has taken some time to mature and is already more than 200 years old.
Big in Portugal & Poland
The Lisbon-based group posted revenues in 2009/10 of €7.3bn and net profit of €200m. Jerónimo Martins is market leader in both Portugal and, somewhat improbably, Poland via discount subsidiary Biedronka.
At home the company runs 334 supermarkets and superstores as well as nine hypermarkets under the "Pingo Doce" banner. The retailer's C&C arm, consisting of 35 "Recheio" outlets, represents one of the few companies world-wide which beats Metro C&C at its own game.
In 1992, Jerónimo Martins created a sub-holding, JMR, which is 49 per cent-owned by Ahold. The relationship with the Dutch retail giant seems to have had its fair share of ups and downs. However, relations have clearly changed for the better since John Rishton has taken over the helm in Amsterdam.
Partnership with Unilever
The group's manufacturing interests comprise an estimated 6 per cent of consolidated revenues. A joint-venture with Unilever dates back to 1949. Currently, Jerónimo Martins has a 45 per cent stake in Unilever Portugal.
The interview was conducted with Alexandre Soares dos Santos and one of his seven (!) children, José Soares dos Santos, who is responsible within the executive committee for manufacturing, "representations" & marketing services.
Talking at the tasteful, old-money offices of the holding company with a wonderful view over beautiful Lisbon and the river Tagus, the grand-old man of Portugese retailing and éminence grise within his country's business world, reflected that he "would not be here in 20 years time". This is one thing staff most certainly will not wish to be reminded of.
"We do not have private planes"
Senhor Alexandre Soares dos Santos, Senhor José Soares dos Santos, how has the current financial crisis in Portugal affected your business?
Alexandre Soares dos Santos: One probably has to accept a decline in purchasing power. But, our like-for-like sales figures for the year to the end of April 2010 grew 9 per cent, which is a fantastic figure. We are even doing very well in Cash & Carry.
If your sales increased as private consumption has remained flat, then you must have increased your market leadership?
I’d like to believe that we are gaining market share, but we can only presume this because many privately-run companies, such as Auchan or Lidl, do not publish any figures.
Why do you think you have been so successful recently?
There are four main reasons. Firstly, our esprit de corps. It took us years to really become a group. We bought various companies in the past, but they retained their separate identities so that two plus two didn’t make four. Now these companies see themselves as part of our group. Managers don’t talk about their own companies anymore, they talk about the group. It’s very important that the various elements within Jerónimo Martins have come together in the way they have.
Secondly, we have acquired considerable know-how and don’t need partners. Thirdly, we have a strong capacity to learn and a will to win. Last but not least, we have virtually no staff turnover. Staff loyalty is high and we have built up our group with the same people.
If you had to define today’s Portuguese consumer in one salient characteristic, what would it be?
They are becoming increasingly brand-oriented as consumer purchasing power has increased and product quality and presentation etc. have continually improved. The more money you have, the better products you can afford to buy.
That brand orientation sounds a little ominous when one remembers that private label accounts for around 40 per cent of your annual revenues…
Actually, the 40 per cent level is only a total average figure. In fact, it is higher because 60 per cent of our sales are in fresh produce; so in dry goods our own label level is correspondingly higher. But to answer your question, we are fortunate in that our “Pingo Doce” own brand is rapidly acquiring the status of a top national brand.
Do you wish to increase own label share beyond its current level?
No, we want to keep own label at its current level in order to safeguard the consumer’s freedom of choice. Whether one is a producer or a retailer, you must always have one thing in mind: the consumer. Therefore, we always carry the brand leaders as well as our own brand in most categories. In fact, we sometimes freeze or even reduce our own brand offer in order not to lose the balance.
Carrefour is exiting the Portuguese market. Are you interested in buying its 524 Minipreço discount outlets?
No, because cartel law would oblige us to relinquish around 60 per cent of the store base.
How do you rate Auchan as a competitor?
Alexandre Soares dos Santos: I respect Auchan very much as a group, it’s a very well-organised family company, but in Portugal they are nowhere.
José Soares dos Santos: We can’t understand why they have missed the Carrefour opportunity. Equally, we were nonplussed when they didn’t buy Carrefour’s hypermarkets.
Alexandre Soares dos Santos: I think it is a question of their not having enough international managers with the quality they require. Normally, failures are linked to the quality of your management.
José Soares dos Santos: Auchan also made the mistake of thinking that the Iberian peninsular is just one country. Of course, it isn’t. What Portuguese consumers prefer to buy is significantly different to what consumers want in Spain. Therefore, Auchan couldn’t harness the pan-Iberian buying volume that it had originally hoped for.
Alexandre Soares dos Santos: It is a typical mistake which the multi-nationals make. They tend to adopt the same retail concept everywhere. For example, Walmart tried to sell snow equipment in a Brazilian summer! It’s simply crazy! That’s central buying for you! They tried to impose an assortment chosen in the US on a completely different country.
So, in essence, you enjoy the advantages of being a genuine local hero?
Alexandre Soares dos Santos: Jerónimo Martins doesn’t try to impose a preconceived concept on any new market we enter. We are not a systems-driven company. We always apply the concept which we believe the market needs. First, we try and understand the country, and then we create or adapt an appropriate format. For instance, we never said, we are successful with Pingo Doce in Portugal, let’s export it to Poland.
José Soares dos Santos: We are a consumer-driven company.
Many retailers pay lip service to this ideal. Why should it be more in your DNA in anyone else’s?
Alexandre Soares dos Santos: I think that this can be mainly attributed to our joint-venture with Unilever since 1949. This partnership has had an enormous influence on the culture of our company. It forced us to think very intensely about the consumer. Secondly, unlike many other retailers, it caused us to think medium and long-term as many multi-national brands do.
Surely, retailers have to make long-term plans as well?
Retailers are essentially in a day-to-day business. What you don’t sell today, you don’t sell tomorrow. Suppliers, however, think differently. The consumer is the king at our company. This makes an enormous difference. As a retail company we have been developed by the manufacturer and by management who came from the manufacturing side into retailing.
José Soares dos Santos: We have never been ashamed of being a retail brand. Coming from the manufacturing side, we can only ask: “Why are retailers ashamed of their brand?”
You mentioned Poland, a country where you have achieved market leadership in less than 15 years. After you had decided that discount was the right concept for the market, how did you proceed?
Alexandre Soares dos Santos: The first thing we did was to send our Portuguese managers off to school for four months in order to learn the language. If you can’t speak Polish, you can’t understand the local consumer. Also, we noticed that many of our international competitors let their management arrive on Monday afternoons and leave on Fridays. We made all our managers live there permanently from day one.
There was no question of their coming home. If they were married, it was compulsory to take their wives. This obliged our managers to get in touch with the Polish people during week-ends and to understand their everyday needs.
José Soares dos Santos: Also, our managers never came to report in Lisbon; we always went to them in Poland.
Alexandre Soares dos Santos: Then we started to look for Polish management and recruited young university graduates as management trainees. To all those who proved themselves we said “Off to Portugal for five years!” so that they really understand the company they work for. The importance of management training, especially in an international context, is another of the things which we have learned from Unilever.
You may be market leader in Poland, but you have a formidable array of international competitors there. These include Aldi, Tesco etc.
Aldi is not really a competitor today, it is still very small. Tesco has expanded into increasingly smaller shops and, when they come into one of our catchment areas, they display signs on the door that they sell at the same price as Biedronka!
Don’t you think that you are becoming a little over-confident?
The success of Biedronka in Poland is my main worry at the moment. When you believe you are good, you start spending more money and getting fatter; it is then that you can lose market share without noticing. This happened to us at Pingo Doce some years ago. Therefore, we have to put pressure on the company in order to keep going.
What type of pressure?
Firstly, we must keep opening stores. Currently we have over 1,500 outlets in Poland and our largest competitor, Lidl, has only around 300. That is an enormous difference; and that lead has to be maintained. Secondly, we must continue to innovate in our assortment. There is already a big difference between Biedronka and what many of our discount competitors have to offer. We offer considerably more fresh produce, including meat, than our competitors.
Thirdly, we must get our people to really understand the supermarket concept and glean from it everything which can profit Biedronka. Our stores already have a far more pleasant ambience than, for instance, Aldi, which is such a dull store. Aldi offers price and the quality, but nothing more. However, we offer that and a lot more.
But aren’t you running the risk of making Biedronka too soft? Would you define Biedronka as a hard or a soft discount concept?
It is a hybrid-type. In price we are certainly discount. As regards assortment and ambience, I believe that, in five years time, discount stores and supermarkets will be virtually indistinguishable. Our experience with Biedronka, for example, taught us to reduce the assortment of our Portuguese “Pingo Doce” supermarkets from 13,000 to 6,000 SKUs.
You are rapidly increasing the Biedronka store base in Poland. Will you expand via acquisitions or organic growth? Do you intend to purchase Dansk Supermarked’s “Netto” outlets?
No, because there would be too much overlap between estates. So our expansion will essentially be organic. However, this does not exclude smaller acquisitions. For instance, we have been trying for months to purchase a small local retailer who runs around 30 stores.
Why are you also diversifying your store portfolio to include stand-alone pharmacies?
A certain number of our Biedronka sites have a lot of space, so why not use it? If you have a chain visited by 700m customers a year, why not capitalise on the customer footfall?
In view of Biedronka’s success in Poland, why don’t you export the concept to Portugal in order to meet the challenge thrown down by the German discounters on your home market?
Because Pingo Doce is in such a strong position. Neither Lidl nor Minipreço have grown in Portugal over the last two years. We have stopped them by revising our price policy. We now provide a better service with a broader and deeper assortment, but match them on prices. Obviously, we keep an eye on them, but they are no threat to us in Portugal. Our main challenge, whether at Pingo Doce or Biedronka, is not to become arrogant or to believe that we don’t have anything more to learn.
José Soares dos Santos: Obviously, we respect Aldi and Lidl a lot and are aware of their power. But we don’t fear them because fear paralyses and stimulates the tendency to copy. We know that massive German power will come eventually to Poland, but it will take years for Aldi and Lidl to be able to apply the type of pricing they have in Germany, and by then we could have, say, 4,000 stores.
Alexandre Soares dos Santos: Of the two, I respect Aldi most, which is why we normally visit Aldi when we go to Germany. I think Lidl is confused at the moment and doesn’t know what to do. When you visit a Lidl store, you don’t understand exactly where you are.
You said earlier that you had enough know-how not to need partners. Why then did you allow Ahold to take a 49 per cent share in the sub-holding JMR in 1992 after 200 years of independence as a family company?
We had a first-class partner in Delhaize for around six years in the 1980s. They are very quality-minded, and we wanted to learn quality in supermarkets. So we invited Delhaize to join us with around 40 per cent.
However, they didn’t want to do anything other than supermarkets, whereas we also cover hypermarkets and C&C. Therefore, we parted company in a very amicable way and continue to be very good friends to this day. As regards Ahold, we were trying to acquire the Portuguese operations of Brazilian retailer Pão de Açúcar in the early 90s.
José Soares dos Santos: We started our supermarket business in Portugal by acquiring 18 stores from Pão de Açúcar. Then, as we expanded our Pingo Doce supermarket chain and wanted to get into hypermarkets, Pão de Açúcar wanted to sell their hypermarkets in Portugall.
Alexandre Soares dos Santos: However, we were a bit afraid of over-extending ourselves financially. By chance, I met Pierre Evereart, the then CEO of Ahold, in Davos, who was interested in expanding to Portugal.
Didn’t a conflict of interest arise, however, at a relatively early stage in the partnership when Ahold became one of your competitors in Poland?
When we moved to Poland, I asked Evereart’s successor, Cees van der Hoeven, if he was interested in joining us, but he preferred to go alone. We wanted our joint-venture to cover several countries, but he wanted to proceed on a case-by-case basis. To be frank, we never had a very good relationship with van der Hoeven, and we were disappointed at the contribution Ahold made to the partnership under his aegis. However, things have greatly improved since John Rishton has taken over the helm at Ahold.
I believe that van der Hoeven always wanted to acquire Jerónimo Martins, but he clearly underestimated us. Had he only looked at our long joint-venture with Unilever, he would have seen that we are not sellers. We told him that we aren’t the type of family who wants to become rich by selling, but he never understood this.
José Soares dos Santos: True, but I must stress that Ahold always behaved honourably towards us, even when they went through the greatest of difficulties at the beginning of this decade.
Alexandre Soares dos Santos: Yes, relations with van der Hoeven were not that friendly, but Ahold never asked us to do anything that was wrong.
José Soares dos Santos: Van der Hoeven was more of a financial guy than a retailer, and we are more of a consumer-driven company. Our management prefers to spend time in the stores than with accountants and mergers & acquisitions people.
Will you continue the joint-venture with Ahold in the future?
Alexandre Soares dos Santos: It has great possibilities, especially now that they have understood we are partners and not sellers.
You and Ahold are also members of the European buying group AMS Sourcing. How important is membership for your business?
It is certainly useful as a source of information, and we do stock some “Euro Shopper” lines, but it doesn’t play a big role in our own label development. Our main partner is an American company called Daymon Wordwide, and we are their largest client in Portugal.
When one does business in Poland, it’s almost logical to think about expansion to the Ukraine. In fact, Jerónimo Martins was on the verge of entry when you decided not to go. Why did you change your mind at the last moment?
You cannot enter a country where you don’t really know who owns the property and land. Also, there has to be respect for the law. We had been expecting the Ukraine to sign a free trade agreement with the EU. This would have been of great advantage to us because we could have kept our head office in Warsaw and sourced in Poland.
But the free trade dispute meant that the door was closed. Today, the Ukraine is torn by political strife and doesn’t seem to know where it stands. Does it want to join the west, i.e., the EU and NATO, or does it want to join the other club? As a family company, we just cannot run this sort of risk
José Soares dos Santos: We visited the Ukraine, and they are very friendly to foreigners, but they seem to be so angry with each other. They must solve their own problems first if they ever wish to attract foreign investors.
How about Russia?
Alexandre Soares dos Santos: It’s a fascinating country, but no way! I think it’s even worse than the Ukraine. Look at the problems that Ikea etc. are having. They desperately need foreign investment, but don’t seem to understand what that requires in terms of rule of law.
José Soares dos Santos: They not only need foreign investment but they also need our type of company. We are a family business with a long tradition. When we enter a country, we stay. We are not like a lot of other companies who take a short-term view. Understandably, the locals resent what happened in the 1990s when some US companies went in and out at the drop of a hat. By contrast, we have already been in Poland for 15 years.
Alexandre Soares dos Santos: There are many other problems such as sourcing and the dilapidated state of the infrastructure, including the roads. Let me give you just one example. Our first visit to Russia was organised by the Russian embassy in Portugal. We flew from Warsaw in two private planes for security reasons, but when we entered Russian air space, one of the planes didn’t get permission to land!
How about Romania?
We have studied and visited the country. But, at the end of the day, you have no cash in your pocket. Purchasing power is very low there, and consumers buy the absolute minimum. Therefore, one’s running costs are extremely high in relation to sales.
You are on record as saying that you will not enter any more foreign markets until at least 2012. Is this still the case?
Yes, but we would always take advantage of any favourable acquisition opportunity which presented itself. Currently, we are studying two countries in South America. One of them is Colombia. I have never been there. Normally, one connects it with the drugs trade etc. However, foreigners who actually live there tell us that this is a false image. In fact, Colombia is a very developed society with high consumer purchasing power, and the drug cartels only operate in very remote areas.
But why not return to Brazil, a large, dynamic threshold country, where the people speak Portuguese?
Obviously, we cannot ignore Brazil and its 200m people, but, although we share a common language, the culture is very different. In fact, it was much easier for us to enter Poland than Brazil because Brazil is a very young country. When we first went there at the beginning of 2000, we thought it would be easy to do business because the food and the language are the same. They are also very nice people, but they have little in common with us Europeans; it’s an American country with no tradition.
That said, we have learned our lessons and are re-considering entry. However, entry must be very carefully prepared. You can’t just say: let’s go!
Do you believe that you will forge new joint-ventures?
I don’t know what the Jerónimo Martins board thinks at the moment, but my position is that, under the present circumstances, we would have to find a partner were we to enter a big country. I wouldn’t want to carry the financial risk alone. However, we would always insist on taking a majority stake in order to keep ultimate control. As long as this requirement was met, we might accept a private equity firm or why not Ahold if they want to join us somewhere?
You have repeatedly stressed during this interview that you are a family company with a long tradition, but have you really never been tempted to sell your business?
I can only talk for my own generation and that of my children. I doubt whether I can talk about that of my grandchildren. My children’s generation is not going to sell, for sure. They were born here, live here and love the business.
Also, don’t forget that we own 56 per cent of this company’s shares on the Lisbon stock exchange. If you add the stake of our second-largest investor, the Dutchman Pieter Hermann, who has 10 per cent, we have an alliance totalling 66 per cent. Therefore, the free float, which is basically divided among UK and US investors, is not very big.
We love our business and do not have private planes or yachts. José is the only one who drives a Porsche! This will tell you a lot about our company’s state of mind. Who knows what will happen in 20 years time? I won’t be here…