European Supermarket Chains Feed Merger Pressures

When Rewe Handelsgruppe wants to test a new line of corn flakes or yogurt, Germany’s largest supermarket chain can now send them to its new field laboratory:

Austria.

“We’re going to be the test market for new products,” said Klaus Smolka, president of Austria’s Food Industry Assn., referring to Rewe’s recent acquisition of Billa AG, an Austrian grocery chain. “It’s simply cheaper for them to try out products in a limited market like Austria.”

With the economy weak and competition strong, Europe’s food retailers are trying to shave costs and expand their market share any way they can. Those efforts have produced a wave of takeovers from Poland to Portugal.

In the last three weeks alone, Royal Ahold NV moved to buy control of Pao de Acucar and become Portugal’s top supermarket owner; VeGe Italia and A & O SpA said they will merge to create Italy’s second-largest chain; Rewe bid 10 billion schillings ($934.6 million) for Billa, and Auchan SA agreed to pay 16.44 billion French francs ($3.28 billion) to acquire Docks de France SA and become France’s third-largest grocer.

And the shopping spree is far from over. Royal Ahold of the Netherlands and Tesco Plc of the United Kingdom, among others, are seeking opportunities to expand in Eastern Europe, analysts concurred.

“For companies operating in pretty mature markets, the only way to achieve bottom-line growth is to acquire footholds in other markets and develop economies of scale,” said Paul Smiddy, a Credit Lyonnais analyst.

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While motives for individual takeovers vary significantly, there is one underlying theme: the cost of doing business. Higher personnel, administrative and transportation costs, falling consumer prices, legal impediments and the cost of growth are forcing European food retailers to undergo the very same kind of consolidation that has already changed other industries.

“It doesn’t take a close analysis to be able to discuss what is happening in the grocery industry,” said Smolka, who recently wrote a report to the Austrian Chamber of Commerce on European food retailers.

The European grocery industry, with the exception of the United Kingdom, is still too fragmented into regional operations, analysts said, while some of the biggest companies are privately held.

The takeovers and mergers that have occurred recently are part of a trend away from regionalism and private ownership toward internationalism and public ownership. The consolidation is expected to continue unabated.

“This consolidation phase is leading to a new status in the grocery industry,” Smolka said in a telephone interview. “It comes down to economic factors.”

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When privately held Rewe bought Billa, for instance, it got not only Austria’s largest supermarket chain, founded more than 30 years ago by millionaire Karl Wlaschek, but also an Eastern Europe network stretching across Hungary, the Czech Republic and Poland.

Some analysts estimated it could have cost Rewe twice as much as it paid for Billa to expand on a store-by-store basis in Eastern Europe. It also has stores in those countries.

Developing as expansive a network of supermarkets in Austria as Billa, which has 1,600 stores and 18,000 employees, on its own is beyond estimation, analysts said.

Rewe also gets a network of stores in which it can cheaply test demand for new products on a population with similar tastes and cultural mores in the more compact, controlled environment of Austria.

“I imagine cutting their costs is a big priority for Rewe,” said Austria’s Smolka.

That comes as the Austrian government said the country’s Jan. 1, 1995 entry into the European Union has meant a decline in prices. That may be good news for consumers, but it means tighter margins for Billa at a time when it needs to expand further to remain competitive in areas such as Eastern Europe.

Billa founder Wlaschek said the decision to sell the company came after Rewe guaranteed it will let Billa continue to operate and to expand “internationally, especially in Eastern Europe.”

For French food retailers, the need to grow by acquisition, especially within France, is even more dire than in Germany and Austria, since the French government on Nov. 27, 1995, renewed a 3-year-old freeze on building so-called hypermarkets. That freeze is based on a desire to preserve a tradition of single-shop grocers and small entrepreneurs.

If Auchan’s acquisition of Dock de France is any indication, the effect could end up being the opposite as larger companies in the grocery food chain swallow up smaller rivals, creating an even narrower pool of competitors.

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Dock de France agreed to be bought after family-run Auchan raised its initial offer. The acquisition creates a formidable rival to Carrefour SA and Promodes SA.

Though the French law that created companies’ desire to grow by consolidation is a domestic peculiarity, it is likely to be repeated in other countries trying to offer the same protections.

And like France, that will push more companies together.

“The new law that we’ve seen in France, which are likely to be applied elsewhere, means the Docks-Auchan scenario is going to be repeated throughout Europe,” said Remi Charpentier, a fund manager at Compagnie de Gestion Privee, which has $30 million under management. “The trend is going to continue.”

The stage was set for Italian companies to begin joining forces in a more competitive atmosphere two years ago when the Benetton and Del Vecchio families acquired Societa Meridionale Finanziaria SpA with the help of Movenpick of Switzerland.

Societa Meridionale Finanziaria, or SME, controlled the Euromercato and GS supermarket chains.

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VeGe Italia and A & O said on July 10 that they were joining forces to create the nation’s second-largest chain, with annual sales exceeding 11 trillion lire ($7.3 billion).

Executives of the companies said at the time that they would consider seeking a stock exchange listing.

Joseph Cassis, a professor of European economic history at the London School of Economics, said continental supermarket owners are years behind the United Kingdom in modernizing their corporate structure and selling shares to the public.

Unlike the U.K. supermarket chains Tesco, Sainsbury Plc or Argyll Group Plc, many continental chains are still closely held by their founders. That will change as they need cash to expand, and the most obvious place to find the cash to expand, Cassis said, is the stock market.

“That is the new trend,” he said. “It does not surprise me to be seeing this now.”