In Focus

The fight for survival
SMALL LOCAL RETAILERS STRUGGLE TO STAY AFLOAT AS HYPERMARKETS TAKE OVER MARKET
WRITTEN BY Kristen Schweizer

With foreign-owned hypermarkets like Tesco, Auchan and Cora here to stay in Hungary – and new ones eyeing the market – smaller supermarkets and neighborhood shops will have to consolidate and join the so-called chain game to stay afloat, retail analysts said. Meanwhile, as hypermarkets look to expand their reach, they are faced with the realities of a nearly-saturat - ed Hungarian retail market.

"Smaller shops can have a chance if they join a chain in order to keep their own procurement prices,” said Márton Szabó, retail analyst at Hungarian economic think tank Kopint-Datorg. While the market share of hypermarkets increases 2% annually, and currently holds a 22% share on fast-moving consumer goods, analysts say there is enough room for hypermarkets and smaller supermarket and neighborhood shops to coexist and thrive in the Hungarian food retail sector – if smaller stores hook up to a chain. “Hypermarkets need a relatively big penetration market, with 100,000 and 150,000 inhabitants in the market zone,” said Ernő Bajai, spokesman at research firm GfK Hungária. “But a neighborhood shop [is needed] for the daily shopping of milk, bread and other things.”

The trend in Hungary’s retail sector is a consolidation of the market, with many formerly independent shops joining franchises. Chain shops on the whole, be it large hypermarkets or smaller discount stores, reached a 73% market share during the first half of 2004, compared to 69% in 2003 and 63% in 2002, according to Gfk. In addition to a massive expansion by hypermarkets in Hungary over the past few years, one effect from Hungary’s European Union accession in May was pressure on enterprises to operate more effectively – one way of which is organizing themselves into chains. Small shops that join a franchise rapidly increase their customer base. And after several years of stagnation, purchases at supermarkets and other shops belonging to chains, including Kaiser’s, Match and Spar, increased in 2003 – for the first time in three years, according to GfK. Losers in the modernization of food retail trade in Hungary are small, independent shops, analysts said, which decreased in the number of purchases in 2003. According to Gfk, the average household in 2003 frequented independent shops 121 times throughout the year, down from 149 the year prior.

NEW MARKET COMPETITOR
In the past few years, Hungary’s food retail sector has seen a flurry of activity, with acquisitions and mergers among shops of all sizes. This will be further spurred by the entrance of Europe’s largest supermarket chain, German-owned Lidl, which opened 14 shops in Hungarian mid-sized cities in November 2004.

Lidl is expected to spawn further competition as it offers deep discount prices on a variety of food products. Discount shops already present in Hungary, such as Plus, Profi and Penny Market, along with hypermarkets, will be forced to lower their prices if they want to survive, analysts said. Lidl officials refused to comment on the chain’s activities in Hungary. “The only thing customers need to know is that we are cheap and that is our strategy,” said Balázs Csizmazia, the company’s marketing director in Hungary.

Since Lidl’s appearance on the market, Kopint-Datorg’s Szabó said hypermarkets have already significantly lowered their prices, even below sale prices. Although Lidl’s prices are lower than other chains’ in Hungary, because it only offers a choice of 1,000 products – the majority of which are Lidl brands – the chain’s prices are not as low as originally thought. “Their prices for a basket of goods were only 15% lower than those for Auchan, the second cheapest [shop in Hungary], and not 30 % or 40% as rumored earlier,” Szabó said.

Hungarian farmers are none too happy with Lidl’s presence in their country. They have held several demonstrations in recent weeks claiming Lidl is unlawfully selling products under the wholesale purchase price. In Dunaharaszti, farmers gave away carrots and cabbages to passers-by to call attention to the alleged practice. In Germany, Lidl and the other largest chains, Wal-Mart and Aldi-Nord, were fined for selling food products below producer prices in 2000, HVG reported.

MERGERS AND ACQUISITIONS
Consolidation in the Hungarian food retail sector began in the late 1990s, when a large number of shops “clubbed together and formed voluntary chains,” Szabó said. It began when Austrian-owned Julius Meinl was purchased by Belgium’s Louis Delhaize Group and was renamed Csemege-Match Trade. Julius Meinl supermarkets at the time were renamed Match and smaller neighborhood shops renamed Smatch. Several years later, in 2002, Csemege added discount chain shop Profi Food Retail to its portfolio. Parallel to activities at Csemege, another supermarket player, Spar Hungary, bought 14 Billa shops from its German owner. The next year, in 2003, Spar bought the Kaiser’s supermarket chain from another German owner. The current Spar chain, headquartered in Austria, boasts 153 shops countrywide: 18 InterSpar hypermarkets, 113 Spar supermarkets and 22 Kaiser’s supermarkets.

Spar spokeswoman Zsuzsa Laber said Spar will further open 15 or 20 Spar supermarkets and four or five InterSpar hypermarkets in 2005. “We are also spending HUF 3.5 billion on a 6,000-square-meter meat processing plans that is similar to seven [existing] plants in Austria,” she said. “This plant will employ 120 workers and will provide meat products for all of Spar Hungary.” In spring 2003, Britishowned regional supermarket chain, Tempo was bought out by Pólus-Coop, a member of CBA Trade. Tempo previously made its purchases through Reál Hungária, a rival chain to CBA formed by six companies that left CBA in 1999. This past fall was filled with rumors that German-owned Metro hypermarket was eyeing its rival Interfruct Hungary, yet no official word on a purchase has been confirmed. Szabó said Metro has also organized a retain chain from independent shops under the name ARO, which is the name of Metro’s private label.

A PLACE FOR HYPERMARKETS
Hungary’s retail sector is clearly dominated by foreign-owned hypermarkets like Tesco, Auchan, Cora and Metro, names firmly rooted in countries across Central and Eastern Europe (CEE) – a region where pricing is perhaps more of a key factor than in Western Europe. CEE consumers typically favor price more than quality or brand.

In addition to regularly screening brand names to offer the lowest options possible, hypermarkets offer their own brand name products, called private labels. The share of private label products was 15% in Hungary in 2003, according to GfK, 2% higher than the year before.

Private label products have a major foothold in milk, tissues and paper towels sales but lack in purchases for tea, shampoo and chocolate, GfK said. Hungary’s biggest hypermarket chain, Tesco, has the highest turnover in private label products, followed by Penny Market and Coop Hungary.

Tesco also exports Hungarian products under its private labels, said spokeswoman Emese Danks. Tesco announced last year it aimed to export HUF 1 billion in Hungarian goods in 2005, with increases of Hungarian goods to the Czech Republic, Slovakia and Poland.

French-owned hypermarket Auchan also said recently it will increase the sale of Hungarian products outside the borders to HUF 5 billion in several years’ time. Auchan currently exports Hungarian wine to Poland and plans to offer the product at its shops in France and Russia. Frenchowned Cora also exports Hungarian wine and said it will export Hungarian fruit and vegetables to Cora stores in France in the near future. In 2005, Cora aims to export HUF 1 billion in Hungarian products. Despite the consolidation, analysts said the expansion of Hungary’s hypermarkets will only go so far before reaching a saturation point. “The number of hypermarkets is a mathematical question,” said GfK’s Bajai. “We have 10 million inhabitants, which means 80-100 hypermarkets are possible in the country – and there are about 60 now.”

Hungarian shopping trends
Hungarians spent EUR 4.2 billion on food, household products and cosmetics in the first six months of 2004, a 7% increase from the same period a year earlier, according to GfK Hungária. The biggest rise was registered in sales of mineral water, which jumped 16%. A GfK survey showed the average Hungarian adult drinking mineral water three days a week, double the amount consumed 14 years ago. And despite concern over rising food prices upon Hungary’s European Union accession last year, prices only increased an average 1% during May-July 2004, compared to Jan.-April 2004. Prices on milk, yogurt and dry pasta fell by 8%, 3% and 1%, respectively, while carbonated soft drinks remained unchanged and wine prices rose 4%. In terms of what Hungarians are eating, a sampling of 1,000 adults by GfK showed potatoes are the most popular food product in Hungary, followed by fruit, poultry, home-cooked soups and vegetables. Tea led the drinks’ list, followed by milk and coffee. Of the Top 20 food products in Hungary, white bread experienced a major fall in popularity to No. 12, down from its No. 3 position in 1989. Pork also tumbled to No. 14, down from No. 5. Meanwhile, chocolate, rice, cheese and pastas all rose several places. For almost half of the Top 20 food products, the consumption rate was lower than 14 years ago, which, GfK said, showed Hungarians are opting for a variety of food and drink types.