The biggest retail gains in Europe stand to be made in the east, says Liz Hamson

The drive of the price-led retailers into central Europe could topple Carrefour and Metro from the top spots in the European grocery market. But the biggest prizes in Europe are further to the east - in Russia, reveals IGD’s European Grocery Retailing Report 2005.
The report identifies Carrefour and Metro as the only truly pan-European retailers and says they are well placed to maintain their lead in the future. However, it points to discounters Lidl & Schwarz and price-led retailers such Tesco as possible future leaders.
IGD’s international programme manager, Anne Bordier, says: “Retailers are consolidating in central Europe. They are moving further eastwards and markets like Ukraine are becoming interesting.”
Lidl has pursued a particularly aggressive expansion plan to take third position in the index and narrow the gap with Metro. “Lidl is the discounter to watch,” agrees Bordier. “The combination of its Lidl and Kaufland hypermarket fascias is extremely powerful.”
However, while central Europe continues to be attractive, it is Russia that represents the largest single opportunity to supermarket groups - domestic and foreign. It is currently the fifth largest retail market and IGD predicts that it will become the largest market in the region by 2020.
Steve Barnes, IGD’s business director, says: “You just have to look at how fragemented the market is to appreciate how big the opportunity is.” He points to the fact that modern retail outlets provide no more than 25% of total retail sales of food products in Moscow and less than 10% throughout Russia because people still shop in open markets, street kiosks and independents.
“The grocery market share of the top five players is just 2.4%. It is a huge market to play for,” he says.
The report also identifies the Ukraine, Bulgaria, Romania, Croatia and Slovenia as potential hot spots in eastern Europe. “The planned accession of Bulgaria, Romania and Croatia into the EU makes these countries highly attractive for international investment,” it says, predicting that a growing number of international retailers will expand their operations into these countries as a result.
So far, Rewe and Metro have proved the leading international players in central and eastern Europe, but again Lidl is expected to take advantage of its strong central European base to expand eastwards.
Because of low consumer spending, shopping habits and lifestyle, the discounters generally are well positioned to exploit the opportunities, suggests the report. However, it warns those not yet in that “the window of opportunity for entering will not last forever”.
As far as major pan-European trends go, consumer demand for value is probably the biggest. The best way for retailers to respond in a price-sensitive market is to invest in private label, suggests the report. Many are already doing so, says Bordier.
“Private label is developing rapidly across Europe. A lot of retailers are becoming more sophisticated in their approach to private label by adopting what is very much a Tesco approach of segementation into ‘good, better, best’ ranges. It is redefining the way that retailers and suppliers are working together.”
Convenience is another trend that is playing an increasingly important role for major grocery retailers and IGD predicts that it will continue to do so as consolidation of the small independent chains continues. IGD also foresees more collaboration between European co-operatives as they join forces to compete more effectively with the larger retailers.
The existing buying alliances and informal relationships between co-operatives provide the potential to create a pan-European entity with a combined turnover in excess of E200bn, it says - more than three times the size of Carrefour’s European turnover of E62.8bn.
While this all sounds like good news for the European market as a whole, there are some clouds on the horizon. The biggest comes in the shape of Asia - India and China in particular, which have already attracted the attentions of Tesco and Wal-Mart. It is not difficult to see why.
Take the Indian market. At the moment, its population is about a third larger than Europe’s. By 2050, it is expected to be two and a half times bigger. Meanwhile, Europe’s population continues to decline.
As Barnes says bluntly: “There are some fascinating statistics regarding where growth is going to happen - and it’s not going to be Europe.”
Countries that at the moment are rank outsiders could also emerge on the radar, he says. “In 2050, Indonesia and Nigeria will have the same size populations as Europe.”
In the short term, however, the European food retail market remains fairly robust at E1,052bn. The wider grocery market, including non-food, stands at E1,363bn.
The question in the longer term is whether opportunities in the emerging markets of central and eastern Europe - such as Russia - will be enough to sustain it.

>>Special Report: Russia

KEY FINDINGS
n Retailers and suppliers should prepare for further market consolidation on a pan-European level
n Lidl & Schwarz could become the third top European retailer after Carrefour and Metro
n Businesses should expect increased collaboration between European co-operatives in the future
n Increasing market consolidation in developing countries creates favourable conditions for the discounters
n In a climate of low inflation or deflation, profit growth for retailers is dependent on volume growth and continuous productivity gains
n The market share of private label will grow
n Multi-format retailers have the opportunity to develop convenience formats
n The window of opportunity for entering into the emerging markets of eastern Europe will not last forever
n As retailers expand their presence eastwards, differences in consumer wealth will create challenges for suppliers
n Russia represents the largest single growth opportunity for retailers in Europe

THE IGD EUROPEAN RETAIL INDEX
1Carrefour
2Metro
3Lidl & Schwarz
4Auchan
5Tesco
6Rewe
7Aldi
8Casino
9Intermarché
10Spar International
11Ahold
12Wal-Mart
13Leclerc
14Tengelmann
15Delhaize
16Dansk Supermarked
17Edeka
18Migros
19Cora-Louis Delhaize
20Eroski

TOP FIVE GROCERY RETAIL MARKETS
Germanye202bn
Francee196bn
UKe177bn
Italye161bn
Russiae133bn

PRIVATE LABEL SHARE BY COUNTRY
Switzerland42%
UK40%
Germany35%
Belgium27%
Spain21%
France20%
Netherlands18%
Portugal11%
Sweden11%
Denmark10%