July 18, 2008

Talk with Système U boss Serge Papin

Serge Papin, President Système U (photo: CIES)
Serge Papin: "Retailer cooperatives are the future, not the past"
Serge Papin, CEO of French retailer co-operative Système U, is a heavy smoker who wants to quit because his favourite hobby is long-distance running.

The 54-year-old has made a start by switching to organic cigarettes.

Papin is an eloquent communicator and freely admits to giving a lot of interviews "in order to make Système U a national brand".

The Frenchman is genuinely convinced that the co-operative represents a superior organisational principle.

He also believes that our current global business model, based on Gordon Gekko-type greed, is doomed to failure.

Posting annual gross sales in 2007 of €18bn, Système U is France's sixth-largest retailer. Its "Hyper U" hypermarkets and superstores as well as its "Super U" and "Marché U" supermarkets are well-known landmarks in the provinces and particularly in western France.

But, apart from minor investments in French overseas colonies, Système U has remained a purely local force. Unlike Leclerc or Intermarché, it has not chosen to expand within Europe. Is this wise or foolish?

Merger with Leclerc?

Recently, the company has extended its range with a small number of "Super U Light" discount stores and "U Express" neighbourhood stores.

For many years, Jean-Claude Jaunait made no secret of his wish for a merger with fellow retailer cooperative E. Leclerc, but, among other things, these plans were scuppered by the cartel authorities in Paris. Système U is now a member of the pan-European buying and marketing association AMS Sourcing N.V.
  
Although the origins of Système U go back to 1894, the company has only existed in its present form since 1983 when its independent members decided to rally around the "U" (unité) banner.

INTERVIEW


Monsieur Papin, ten years ago your predecessor told us that he was interested in merging with Leclerc. Why didn't the merger come off?


At the time, Leclerc and Système U wanted to operate hypermarkets, viz., supermarkets. However, we couldn't agree on the definition of what exactly constitutes a hypermarket and a supermarket.

Does a hypermarket start as from a sales surface of 2,500 m² (26,909 ft²), as Leclerc seemed to think it did, or does it start at over 4,000m² (43,056 ft²) as we wished to define it?

Also, many of our "Super U" and "Hyper U" outlets were in direct competition with Leclerc.

But at least you managed to create a joint buying office called "Lucie" in 2001...

Lucie was created when we found that we both wanted to extend our own label ranges. The cooperation worked well for around three years. However, in a  market like France it is very difficult longer-term when two ambitious partners both strive to grow market share.

So you then joined the pan-European buying group EMD in January 2006. Why then the change to its rival AMS Sourcing at the beginning of 2009?

Our structure dictates that we could only really become members of EMD or AMS. We decided against AMS in 2006 due to the crisis which one of its most important members, Ahold, was going through at the time.

Since then, however, EMD has become pretty heterogeneous, and certainly more so than, for instance, Euromadi in Spain or Markant.

In our opinion, EMD needs to restructure itself. We, however, want to buy in the price-fighter range in order to counter the challenge from Lidl, and it is exactly in this field that AMS has a lot of know-how.

Could you imagine working more closely with a foreign retailer cooperative such as Edeka, ICA or Kesko?

These ideas have certainly never been strangers to me. However, I think that the companies you mention have more of a multiple-type structure than, for instance, Leclerc or Système U, where the independent shop owner-member still has the most important say.

So basic democracy is the name of the game at Système U?

Yes, because it is fundamental. What is a cooperative really? It is a dynamic collectivist structure which aims to further personal progress and development. The members' general interests can only be served by the members themselves and their votes.

Is centralised decision making really so bad?

Let's take Intermarché as an example. Its costly disaster in Germany was made on the basis of a purely financial decision. It wasn't a move which the members ever wanted. Something got out of kilter there, and they departed from the straight and narrow of the retailer's metier.

However, retailer cooperatives do have one structural disadvantage compared with the big multiples. They are limited in terms of the money they can raise on the international capital markets.

I don't agree at all. Our capital requirements are relatively modest because we are primarily a supermarket operator, even though our sales surfaces are relatively large. Our members are able to finance this. But the big retail multiples need large amounts of capital in order to finance their international expansion.

How about some young person who wants to run his or her own supermarket, but who doesn't have enough money? How do you go about helping him or her?

Such people are often supported financially by other members. We also have our own fund, called "Expan U" invested with a double-figure million sum.

With many retailer cooperatives ,you often find that a third of the members are very good, a third are average and a third tend to be weak. Is this also the case at Système U?

I suppose it is, in fact it is the case everywhere else. You've got to try to push the average third into the very good category and to raise the weak third into the average category.

This can only be achieved by internal training, an internal information policy that is worthy of the name, and the systematic exchange of best practice.

Leclerc expects its independent shop owner-members to devote a third of their time to central office. Why doesn't Système U do this?

Obviously, it is desirable that members are actively engaged in the common cause, but, for instance, you couldn't expect this from someone who is just starting. Such a person should concentrate their full energy on building up his or her own business, which takes time and effort.

At a later date, when the individual has more experience, there are always opportunities to get more involved with the collective, depending, of course, on one's propensities and interests.

In view of the increasing concentration in international retailing, isn't the retailer cooperative doomed as a business model longer-term?

The excesses of capitalism, which came to a head in the sub prime and financial markets, have clearly revealed the limits of our current world economic model. In fact, retailer co-operatives represent the future, it's our turn now!

To what extent can retailer cooperatives provide a real alternative?

Retailer cooperatives combine collective solidarity, family capitalism and caring for the well-being of society as a whole with collective innovation.

Today's scientific and economic researchers are demanding an end to current pyramid-type power structures in favour of matrix-structured organisations which will act as catalysts for innovation.

Despite €18bn in annual revenues you are only a middle-weight in European retailing. Have you enough critical mass to survive the international concentration process?

We've been around since 1894. With a market share of around 10 per cent, suppliers can't ignore our existence — even if they are multinational groups such as L'Oréal.

Currently, Lidl and Aldi are profiting from the recession in France. Are you worried?

No, consumers are adapting their buying behaviour; and we have to adapt to this. When petrol and heating oil prices went through the roof, people actually spent less on food for the first time. That is incredible! All retail concepts felt the heat, including the German hard discounters.

Lidl and Aldi have grown strongly in France over the last 20 years. Do you believe that they will be able to continue this growth over the next 20?

The hard discounters have passed their zenith. Their growth is due to the opening of new stores and not to an increase in productivity on the shop floor.

Their concept lacks individuality. After all, they offer the same products from northern Germany to southern Italy. At a hard discounter, the customer is not a customer; he or she is a mere consumer. They are not retailers who adapt to the needs of their customers; all they do is operate an industrial system.

You talk as though Lidl, despite its undisputed success in France, was a foreign body in your country?

You can't offer the same assortment in Alsace as in Corsica, and do so without a smile. Lidl will soon become the fifth-largest importer into France, whereas we buy over 4,000 own label products from small and medium-sized enterprises in France.

That is our big advantage because customers are very attached to local and regional products.

Why then are you expanding your own discount subsidiary under the "Super U Light" banner?

Our goal is to be market leader or co-market leader in every catchment area where we operate. There are some sites where this can only be achieved via a discount concept with low investment costs. You see this, for example, in Paris where store rentals can reach 5 per cent of annual revenues.

In 2004 you introduced a new own label price fighter range called "Bien Vu". Has this helped you score points off the discounters?

We already sell 450 lines under this label, and with great success. However, we want to upgrade its quality because too many of these lines are not directly comparable with Lidl's products. This will give us a really effective weapon against Lidl.

Are you holding any other trump cards up your sleeve?

Our supermarkets are locally situated and therefore easy to reach. What time-impoverished consumer likes to drive long distances, when petrol prices are so high, in order to buy at an impersonal big-box store. It's not for nothing that Carrefour is losing market share on the food market.

But you also operate hypermarkets...

The emphasis of our hypermarket assortment is clearly on local and regional products, especially when it comes to fresh produce. And our stores are deeply rooted in the locality. We sponsor local sport clubs, cultural events and charity organisations. Last but not least, our store owners have a very strong rapport with their customers.

The current French government has liberalised the law forbidding the sale of goods below cost price. Who stands to profit from this most?

Overall, the liberalisation of "loi Galland" will contribute to more transparency regarding terms & conditions. This will help us a lot to sell brand goods at consumer-end prices which can compete much better with those of the hard discounters.

I don't think the discounters gain anything from the new liberalisation as they sell a lot of own label which was hardly affected by the old law.

 
Related article in German: Interview by Mike Dawson in Lebensmittel Zeitung, no. 29, 18.07.2008. Original French version available on request.


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