Italy: Retail modernisation with help from abroad
Elsevier Food International Vol.8, No.3 September 2005
Pascal Kuipers
Traditional patterns still prevail in Italy’s retail trade. The market is fragmented and small, privately owned businesses still represent a considerable market power. The road to modernisation is full of pitfalls due to the economic slump.
The business climate in Italy looks gloomy. The country is struggling with a recession caused by a combination of high levels of public spending and taxes, too much regulation and red tape. Moreover, the fraud scandals of 2003, which involved leading Italian food companies Cirio and Parmalat, are not too encouraging a sign for the state of Italy’s corporate governance system.
Last May, The Economist referred to Italy as ‘a Mediterranean disaster story’, pointing out that Italy’s economy depends on small- and medium-sized companies in industries such as textiles, furniture or food processing, which are prone to face fierce competition from abroad, increasingly from China. “Such companies needed a low cost-base to sustain competitiveness; in times of inflation, this was secured by devaluations of the lira. That get-out is no longer available now that Italy is using the euro.” The Economist states and refers to Italy’s current leadership who simply denies that there is something structurally wrong with the Italian economy. “According to Mr Berlusconi, Italy is not in recession, but going through a phase of ‘stagnation’. That suggests there will be no quick recovery,” The Economist reads.
Market characteristics
With its 58 million inhabitants and consumer behaviour known to be sensitive to quality – health, taste and tradition are dominant factors influencing food sales – Italy’s food retail sector has the potential for further growth. The economic slump and gloomy business climate, however, cools down expectations.
In 2004, retail sales stagnated, after years of growth. Total sales recorded a three per cent increase (in 2003 this was 6.7 per cent) but like-for-like sales declined by 2.3 per cent. Discounters grew more than twice the average in the market and other retailers responded with a promotional zeal and putting more value lines and private labels on the shelves.
The well-known contrast between the north and the south of Italy is also visible in the food retail sector. Retail development is concentrated in the more developed and industrial northern part of the country, whereas development in the agricultural south lags behind. Spendable income is lower and has declined in the southern part, which is not encouraging for retail development.
A further feature of Italy’s retail sector is its fragmentation, with top ten retailers accounting for just half of retail banner sales in 2004, which is valued by Planet Retail at €99 billion. Grocery sales only – valued by Planet Retail at €80 billion – shows a 48 per cent minority share for the ten largest retailers in Italy. Concentration ratios are much higher in countries like France, Germany and Austria where in 2004 the top five retailers respectively accounted for 72 per cent, 65 per cent and 76 per cent of total retail banner sales. Looking at the top ten figures, the percentages are 89, 83 and 92 per cent, respectively.
With its independent, mostly privately owned, small- and medium-sized companies still hold a large share of the market, Italy’s food retail market remains fragmented. Small grocery stores and food specialists still retain a considerable market power. Especially in the south of Italy, where there are more than 70,000 traditional shops that represent just 12 per cent of total food sales. In early 2004, super- and hypermarkets accounted for some 63 per cent of total sales, which is much lower than in other large European markets like France and Germany, where according to ACNielsen as early as in 2003 super- and hypermarkets accounted for 96 per cent and 80 per cent, respectively.
Modernisation
Things are however changing, as the Italian retail trade has been undergoing a modernisation in recent years. In early 1999, super- and hypermarkets accounted for just over half of total sales, so these formats are gaining importance. Furthermore, the number of stores has been declining steadily in recent years. Research by IRI and Mark Up shows that in 2004, there were 94,557 food stores in Italy, while in 1999 the number was 106,667.
The process of retail modernisation was set off by the Italian government that has allowed a deregulation since early 1998, making it easier to obtain permits for new store development, especially for larger sized stores. Planet Retail says that despite resistance by lobby groups, new legislation accelerated closure of small stores. “Nevertheless, there is still tremendous resistance against hypermarkets, and retailers need to traverse through countless layers of bureaucracy to obtain planning permission. In contrast, authorisation for small stores up to 250 square metres is no longer required,” PlanetRetail reports.
The Italians’ preference of supermarkets over hypermarkets is also explained by socio-demographic reasons, such as the ageing population and a majority of Italians who continue to live in small towns and cities.
A good example of a banner benefiting from new legislation is Sma, a supermarket banner with an average sales area of some 800 square metres. Managed by Eurofind – a joint venture established in 1997 by French retailer Auchan and local partner IFIL, an investment firm owned by the Agnelli family – Sma rapidly increased its presence in the market from 148 stores in 1997 to some 1,310 in 2004, mostly via franchising agreements. “As a result of the Eurofind joint venture, Auchan successfully managed to circumvent many of the country’s domestic regulatory and bureaucratic hurdles, which otherwise would have prohibited store expansion,” Planet Retail wrote in late 2004.
Through the holding company Eurofind, Auchan and IFIL each owned 50 per cent in the Italian retailer Gruppo Rinascente. In November 2004, both partners decided on Auchan acquiring IFIL’s stake worth €810 million, thereby also gaining full control of important food retail activities such as the Auchan branded hypermarkets and Sma supermarkets. Both Eurofind-partners sold Gruppo Rinascente’s non-core assets such as department and variety stores for €888 million to a consortium led by Pirelli Real Estate. The Eurofind joint venture was subsequently dissolved.
Foreign retailers
Eurofinsd demonstrates the importance of a local partner for foreign retailers that want to set up shop in Italy. Often, foreign retailers are seen as a threat to the interests of local Italian firms. “A country like Italy can’t afford to let the majority share of its distribution sector fall in foreign hands,” said Aldo Soldi, chairman of Coop Italia, on 20 March this year in an interview with the Italian newspaper Il Sole 24 Ore. According to Soldi, this would have a “devastating effect on the medium to longer term.”
The key to the problem lies – says Soldi – in the fact that Italy itself lacks large retail companies to support the development of the distribution sector. For years Italy itself has hindered the development of a modern distribution sector says Soldi, who regrets the sale of Gruppo Rinascente as a loss of a piece of Italian history.
In December 2004, the Italian press reported about concerns amongst governmental circles that a rumoured sale of local Italian retailer Esselunga to Wal-Mart would lead to job losses and store closures. Due to its size, Wal-Mart triggers such response in any market in which it is rumoured to be interested. Other rumours concern UK retailer Tesco that is said to be interested in local retailer Bennet. According to PlanetRetail this is a €1.4 billion retailer with a market share of 1.4 per cent.
There is a correlation between the modernisation of Italy’s retail sector and the rising influence of foreign retailers. The increasing share of super- and hypermarkets is obviously connected to the increasing share of foreign retailers in Italy’s super- and hypermarket channels. Auchan acquiring all of Gruppo Rinascente’s food retail operations in late 2004 will further increase the percentages .
Foreign retailers in Italy also need local partners because buying groups dominate the market. As said, Italy is a fragmented market, but on a buying level it is a concentrated market. Most small- and medium-sized independent retailers are organised in buying groups that are an important aspect of the Italian retail sector. The top five buying groups account for almost 84 per cent of the market and 81 per cent of sales surfaces. Membership of such a group is a prerequisite for survival, especially when competition increases. German retailer Rewe – active in Italy since 1994 – had never been involved with any buying group until December 2004 when it set up an alliance with local retailer Conad. “The pressure recently increased as Rewe was the only major player left in the country that was not part of a buying group,” a Rewe spokesperson told PlanetRetail.
Conad is also involved in a joint venture with French retailer Leclerc and rumours are heard that all this might lead to a new strategic alliance of independent retailers should Rewe – who still is a member of Eurogroup with Coop Switzerland – join in.
If consolidation is set to continue, and foreign retailers play an active role in this process, the membership base of these buying groups will also become more international. As is the case with Intermedia, whose member Gruppo Rinascente now belongs to Auchan and whose other members Bennet and Gruppo Pam are rumoured to be on the radar screen of foreign retailers.
The French connection
French retailers especially have built large businesses south of the Alps. Auchan and Carrefour are now Italy’s second and third retailer. Auchan first entered Italy in 1989 with a limited presence of four hypermarkets. It really took off in 1997 when it teamed up with Agnelli via IFIL and subsequently created Eurofind. Italy is now Auchan’s most important market abroad.
For Carrefour Italy is – after Spain – its second largest foreign market. The origins of Carrefour’s presence in Italy dates back to 1987 when Promodès – which merged with Carrefour in August 1999 – entered the Italian market. Promodès then had a ten per cent minority share in local retailer Finiper. Via its partner Finiper, Promodès took a minority share in local retailer GS in 1997 and in 2000 Carrefour/Promodès gained control of GS, then making it Italy’s second retailer.
Recently Carrefour has been very active in Italy. In December 2004, Carrefour clinched a franchise deal with regional Italian cooperative Ce.Di.Marche that has adopted one of the Carrefour banners in Italy and has been supplied by Carrefour’s buying group since January this year. In March, Carrefour announced that it would become majority shareholder of its Italian partner Finiper and mid April 2005, Carrefour acquired a controlling 70 per cent stake in Aligros, a €160 million retailer with operations in southern Italy.
French retailers in particular but also German retailer Rewe – who acquired local retailer Standa in 2000 – play a dominant role in the consolidation process of Italy’s fragmented retail sector. Other foreign retailers are also examining this market. US retailer Wholefoods for instance, and Spanish retailer Mercadona have expressed their interest, as have Wal-Mart and Tesco.
The modernisation trend of the Italian retail sector is set to continue. Because the economy is depressed and the government is not actively restructuring the economy and the business environment, foreign retailers will be the major agents of change on the short to medium term, hoping for economic improvement in the medium to longer term.
(Data sources: Planet Retail, FAS/USDA, MINEFI, IRI, Mark Up, The Economist)
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