KPMG analysis: Concentration in food retail is increasing

Bankruptcies will increase - obesity as a major challenge

Concentration in food retailing is progressing, and discounters will expand their market share in Germany from 36 percent to 45 percent over the next five years. The number of insolvencies in the industry will increase from almost 7.500 in 2002 to over 10.000 in 2005. Consumer appreciation for top branded products continues to decline. Obesity is one of the future challenges, not only for industry but also for trade created by the EuroHandelsinstitut.

Hypermarkets are growing - small specialty shops in city centers are on the verge of "off"

Concentration in food retailing has intensified: while the top 10 in the industry accounted for 1990 percent of total sales in 45, by the end of 2002 it was already 84 percent. The development of business types is clearly at the expense of small-scale specialist shops (< 400 square meters), the number of which has almost halved since 1980 (- 42 percent). Hypermarkets (+ 242 percent) and discounters (+ 50 percent) have increased significantly in the same period. Owner-managed retail stores such as small supermarkets or kiosks will die out in inner-city locations by 2010 and will only be able to exist as local suppliers in rural areas. KPMG estimates that the number of insolvencies will rise from almost 7.500 in 2002 to around 10.200 in 2005.

Johannes Siemes, head of the Consumer Markets segment at KPMG: “The expansion of large-area stores, which are also preferred by customers, such as hypermarkets, convenience stores and cash & carry markets, has also accelerated the excess space. Germany has twice as much retail space per inhabitant as Great Britain, for example. Of course, this is at the expense of profitability and thus competitiveness.”

According to Johannes Siemes, among the top 20 food retail companies, three groups in particular have been able to record significant sales growth in the last three years:

• The top 3 companies Metro, Rewe and Edeka, some with high foreign commitments.
• The discounters Aldi, Lidl and Schlecker, who benefited from the price awareness of German consumers and also expanded abroad.
• Regionally focused providers such as Bartels-Langness or Bünting, who met the consumer's desire for regionally influenced product ranges and product presentation.

Frank Pietersen, Manager in Consumer Markets at KPMG: “In the saturated German market, market shares can only be gained by crowding out competitors. That's why retailers will have to work out and communicate the uniqueness of their own offer even more in the future."

With service and quality out of the price spiral?

While the argument "cheap is cool" is decisive for many customers these days, this is likely to change in the medium to long term, at least in the food retail sector, according to Pietersen. Due to the socio-demographic trends, new demands are increasingly being placed on service, product quality and range. In the opinion of the experts, it is advisable that harmless ingredients (e.g. in the case of diabetes) and single pack sizes are given greater consideration in future product development. Due to the increasing number of older people in this country, given the restricted freedom of movement of this population group, the food delivery service will also become increasingly important in the future.

Pietersen: “It is not only critical to note that the German retail trade is now increasingly distinguishing itself through price, but also that it neglects differentiation through product quality and the service component. Two thirds of consumers are still not being addressed in a way that is appropriate to the target group. Instead of concentrating on quality-conscious customers and smart shoppers, everyone is only targeting bargain hunters, who of course do not feel tied to any retailer or brand.”

Brand loyalty is declining

The appreciation for branded products suffers to the same extent as the run on the discounters increases. In 2002, the sales share of own brands within the food product groups (excluding Aldi) was already 29,3 percent (2001: 26,4 percent). No wonder, since the price differences between manufacturer brands and private labels are considerable. They amount to up to 40 percent for individual product groups.

Pietersen: "If the customer does not see any clear added value in the manufacturer's brand, he will prefer to use the retailer's own brand. Prerequisite: The private label enjoys trust and can transfer the positive experiences of customers with the company and its branches to the private label through good quality and a reasonable price-performance ratio.”

Obesity: Obesity as a global challenge also for trade

The World Health Organization (WHO) declared obesity as the number one health problem in 2004. Experts estimate that at least a third of the adult population in western industrialized nations is overweight. The growing prevalence of obesity has already had an impact on retail products in the US: "There, the market for organically produced products has shown the highest growth rates of all segments over the last decade," says Pietersen.

In the USA, individual retailers have been able to significantly increase their sales in recent years by cleverly picking up on and marketing trends such as health awareness, fitness or food safety. “The classic hypermarkets and supermarkets are already responsible for half of sales of organic products in the USA. Ten years ago, their market share was less than 20 percent,” explains Pietersen. "These products will find their way onto the shelves of wholesalers, supermarkets and discounters worldwide."

Radio frequency technology drives rationalization

Recent announcements by Metro, Tesco and Wal-Mart will soon see the use of RFID (radio frequency) technology at the logistical level. As early as the end of 2004, Metro's most important suppliers are to equip their load carriers with RFID receivers, thus enabling large-scale use. Michael Gerling, Managing Director of the EHI: “RFID is the number one technology in retail. Even more than the introduction of barcodes 1 years ago, RFID will drive rationalization in the future. German retail has the opportunity to be at the forefront of development.”

Market analysis "Status quo and perspectives in the German food retail trade 2004".

Here you can download the market analysis as a pdf file [download]

Source: Berlin / Dusseldorf [ KPMG ]