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Europe shops till it drops
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April 16, 1999: 2:12 p.m. ET
Supermarkets boom but regulators close in and Wal-Mart looks to expand
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LONDON (CNNfn) - European shoppers are not the only ones filling their baskets as consumer spending soars. The stores themselves are proving every bit as willing to make a big purchase and eat up the opposition.
Friday's announcement of a proposed $10 billion link between two of the United Kingdom's largest retailers is just the latest in a string of mergers and acquisitions in the sector.
Consolidation is whipping through the European food retail sector as a handful of industry giants strive for scale and new markets.
Kingfisher's all-stock bid for Asda, Britain's third-largest food group, would take the combined group into the sector's global top 10. Talks between the two companies broke down last year, but their revival highlights the appetite of Europe's retail giants to secure even greater scale.
An Asda store
Their hunger is not just driven by economics. Retailers are wary that they may have a narrow window of opportunity to consummate deals before regulators shut up their shop.
Supermarkets have been singled out for the wrath of regulators and consumer groups. Supermarket giants such as Tesco and Sainsbury in the U.K., Germany's Metro Group and Carrefour in France are charged with holding too much power over their suppliers and inflating prices for consumers.
"There has been a change in the balance of power between retailers and manufacturers," said Michael Waterson, an academic at Warwick University in the U.K. and co-author of a study on the sector to be published in the journal Economic Policy.
Dancing down the aisle
Consolidation has massively raised the scale of the industry leaders -- nine of the world's 10 largest supermarket chains are European. Only U.S. giant Wal-Mart dwarfs the region's stores, and it is examining a major expansion of its discount strategy in Europe.
The U.K. Monopolies and Mergers Commission has opened an investigation into whether consumers are being overcharged by five big store groups which hold a 64 percent market share, the highest in Europe.
The European Commission has decided that food stores may be abusing their position and is making its own inquiries. In the European Union the market share of the top 10 food retailers has climbed from 28 percent to 36 percent over the past five years.
Top retailers have had to switch their strategic focus after gaining control of home markets. Strict planning controls have limited growth of superstores, making acquisition abroad and diversification the only options for growth.
Overseas investment has a mixed record so far. Tesco's sortie into France ended in retreat while the advance of German discount retailers into the U.K. market failed to hold. U.S. acquisitions by Sainsbury (SBRY) have found the U.K. firm learning that it lacks the clout in a more fragmented market.
Competition concerns have been driven by the monopolies which vendors can derive from their giant out-of-town sites. Carrefour (PCA), France's largest, was among the pioneers of so-called hypermarkets but has been forced to grow through acquisition after the French government banned further developments in 1996.
'Let's get into Levis'
Leaders in smaller domestic markets such as TSN in the Netherlands have led the charge to buy overseas, said Richard Lloyd-Owen, head of the consumer group at consultants Deloitte & Touche. "The U.K. reaction is 'Let's get into selling Levis'," he said.
The shift into non-food items including clothing and computers has blurred the traditional lines in the retail sector and added to the clout which supermarkets can wield. "There has been a rise in margins and the importance of supermarkets' own brands," said Waterson.
The battleground has also turned to distribution, with store groups pushing online selling. Tesco launched its own Internet access service and has been the market leader in home shopping and boosting market share with the first loyalty card.
Tesco (TSCO) has also been the driver of continental expansion with 91 stores in central Europe including 15 in the Czech Republic acquired from K-Mart (KM) in 1996. Overseas sales climbed 25 percent last year and account for 7 percent of sales.
Germany still has Europe's most backward retail sector with companies held back by restrictive opening hours and planning regulations. Metro (FMEO), Europe's largest retail group, has expanded rapidly abroad and has operations in 15 countries.
Wal-Mart stocks up
Retailers remain sanguine about the impact of the regulators' attentions, mounting a vigorous press campaign to pledge their innocence and launching a predictable round of price cuts.
However, analysts believe the actions will cut into margins whatever the outcome as the store groups err on the side of caution and trim prices.
This is the aisle down which Wal-Mart wants to drive. The U.S. giant already has two acquisitions in Germany and has been linked with Safeway (SFW), the U.K.'s fourth-largest food group. The company is also considering acquiring huge sites from Toys 'R Us (TOY).
With annual sales of $105 billion, Wal-Mart is twice the size of Metro and has the clout to give Europe's shops a scare. Whether this is the right time to demonstrate just what it can do with economies of scale is open to question. 
-- by staff writer Doug Cameron
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