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Spain Food and Drink Report Q3 2009
Business Monitor International, June 2009, Pages: 71
Spain Food and Drink Report provides industry professionals and strategists, corporate analysts, food and drink associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on Spain's food and drink industry.
Over the last five years, the Spanish retail sector has been among the most dynamic in Western Europe, with rising affluence meaning that most grocery retailers in the country have enjoyed a period of rapid growth. One example of this is Carrefour, with the firm’s Spanish division – Centros Comerciales Carrefour (Carrefour España) – by far its most dynamic in Western Europe over the last three years. However, the Spanish economy has been hit hard by the global economic downturn and the bursting of the Spanish property bubble, and it is likely that most retailers will have to work much harder to continue to grow over the next two years.
The Spanish economy is set to be one of the worst performers among major developed economies in 2009, with forecasts of a real GDP contraction of 3.5%. We do not expect growth to pick up until the second half of 2010, as the labour and construction markets remain under considerable duress and external conditions remain unfavourable. The economy has entered into a deflationary burst, with real output contracting sharply, and asset and consumer goods prices falling. We do not expect a year-on-year (y-o-y) increase in real GDP growth until Q210 at least, and expect zero growth in 2010 as a whole. The unemployment rate has reached 14.5%. We have revised our forecast for unemployment, and now envisage it peaking at above 20% in 2010, which would be the highest rate since the introduction of the euro and by far the highest among developed states.
This weakness has quickly filtered through to consumer spending and is underlined by Carrefour’s Q109 results. The firm reports that like-for-like sales at its Spanish stores contracted by 6.3% with sales at its hypermarkets falling by 9.8% and sales at its supermarket sales falling by 4.6%. The only glimmer of strength was at the firm’s hard discount stores where like-for-like sales increased by 2.9%. However, Carrefour’s Spanish portfolio is dominated by hypermarkets, and the strength of the discount format only made a small dent in the overall bleak picture. In response, Carrefour has launched a new marketing campaign focused on price, employing the slogan ‘We Lower Prices’ in conjunction with price cuts of up to 25% on 10,000 food and non-food items. Even if this strategy does provide a boost to sales, clearly its impact on margins could be acute.
One firm that may find the downturn easier to navigate is Mercadona, which enjoyed like-for-like sales growth of 10% in 2008 and has announced plans to invest EUR600mn to open 71 new stores in 2009. Mercadona's optimism in the face of adversity rests on its low-priced business model, which should prosper during an economic downturn. Like Wal-Mart in the US, Mercadona focuses on consistently offering the best possible prices rather than short-term price promotions, and in the four months to February 2009 the firm's focus on efficiency and cost savings allowed it to lower average prices by 10%, with plans to reduce average prices by a further 17% in 2009. This is partly thanks to an emphasis on private labels, with Mercadona's own-brand products accounting for about a third of its sales, as well as the elimination of products that do not bring in sufficient revenues, offer poor value or overlap with other products. Other cost-saving measures saw the retailer replicating ideas usually seen in the discount sector, such as removing the outer cardboard packaging on toothpaste and eliminating packaging for fruit and vegetables, and this emphasis on price can be expected to lead to market-share gains during the downturn.
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