Compact hypermarkets
Elsevier Food International Vol.8, No.2 May 2005
Pascal Kuipers
Retail watchers traditionally assumed that hypermarkets and supermarkets would become the two dominant retail formats of the future. This belief, however, seems to be under pressure due to the increasing attention that retailers give to the development of so-called ‘compact hypermarkets’.
The concept of a compact hypermarket is not new. It is merely a synonym for other hybrid formats such as ‘superstores’ or ‘mini hypers’. In recent years, however, such hybrid formats have received increased attention, especially in competitive markets and markets with strong government regulations.
“If you look back at Carrefour’s initial foray into Hong Kong, you will see that they had a concept that was around 3,000 square metres, says Ethan Sinick, Management Venture International’s (MVI) vice-president facilitated products Europe. “Any countries that have building restrictions due to physical space or legislation are prime for this format. Retailers who had believed that the 15,000 square metre hypermarket was the format of the future are now returning to a focus on these compact hypers. The term is only applicable to retailers who have formats – or are in markets – where very large hypermarkets exist. Furthermore it concerns retailers who developed a clear strategy with a specific and consistent compact hypermarket concept. The driver to this format has been a realisation that it possesses a higher ROI in competitive markets. In addition, it can be a format which skirts increasingly aggressive planning regulations.”
Compactly cloned
In order to qualify as a ‘compact hypermarket’ it should either be a compact version of an existing hypermarket concept, efficiently cloned for a smaller surface (e.g. Tesco in central Europe) or a format used by retailers for a specific brand (e.g. Kaufland from Schwarz Group or Auchan’s Cityper stores in Italy).
“The format combines food and non food in a store size of 1,500 metres (e.g. the smallest Kauflands in Poland) to 5,000 square metres depending on the retailer,” Sinick continues. “Usually you get a 30 per cent plus non food mix in a store of this size, which is clearly segmented into a food and a non food section emulating the shopping pattern of larger hypermarkets. Compact hypermarkets seem to focus on simple non-food categories like periodicals and books, kitchen and house wares, electro domestics, car products and small DIY assortments and a limited clothing range. Looking at compact formats of Kaufland, Tesco and Ahold you can see that certain categories have disappeared. In-store foodservice areas, large appliances/white goods, furniture, extended ranges of DIY and electro domestics and in-store mobile phone kiosks, satellite television sign-ups and Internet points.”
Apart from downsizing an existing hypermarket concept to a compact format, the other way round – i.e. upscaling a supermarket operation to a compact hypermarket – is also possible. “Yes, you could go either up or down,” says Sinick. “The challenge with going from supermarket to compact hypermarket is that it requires a new non-food organisation. It’s much easier to scale down.”
According to Sinick, store concepts like Interspar or Albert Heijn XL cannot be called compact hypermarkets. “At MVI we look at the sales mix between FMCG and non food,” he says. “The challenge with Albert Heijn XL is the sales mix. Although the store was bigger than the original supermarket concept, I don’t believe it ever achieved the targeted sales balance of food and non-food. A lot of the extra space went into categories that are really core FMCG, like baby products, health and beauty and a bulk pack section. This store is more of a big supermarket – even from a shopper perspective. I have similar feelings about Interspar although it seems to have achieved the minimum threshold in most markets. Auchan’s Cityper concept in Italy would probably fit the definition.”
European competition
Compact hypermarkets are a global phenomenon. South American retailers like Grupo Pão de Açúcar (Brazil) and D&S (Chile) also express their intentions to develop compact hypermarket formats. In its 2003 annual report, Grupo Pão de Açúcar – also referred to as CBD – mentions “[…] the creation of a store model known as ‘compact hypermarket’. With building costs 50 per cent lower than traditional hypermarkets, the new concept is composed of smaller stores, which have a sales area of approximately 5,000 square metres and distinguished layout.” While it is still focused on future growth by increasing hypermarket operations with its Extra banner, CBD aims on a reduction on capital invested by lower investment in store construction.
In June 2003, Chilean retailer D&S decided to unify all its compact hypermarket operations under the Lider Vecino brand. Lider is D&S’ hypermarket banner and Lider Vecino – with an average selling space of some 3,800 square metres – is its ‘neighbourhood hypermarket’ brand. As early as in 1987, D&S started its compact hypermarket activities with Ekono Hypermarket, an upscaling of the Ekono supermarket operation it established in 1984.
“From the point of a pure definition of the format, this is a global phenomenon, says Sinick. “But I think there is clearly more momentum in a planned and scaled way in central and eastern Europe than in the rest of the world.”
Since the mid 1990s, the already competitive central European region has witnessed the market entry of most of the world’s international retailers, exporting their hypermarket operations to this then promising virgin retail territory. In recent years, German retailer Schwarz Group has aggressively expanded its Kaufland compact hypermarket concept in this region. Kaufland is now represented in the Czech Republic (market entry in 1997), Slovakia (since 2000) and Poland (since 2001).
“Hypermarket operators should not focus on operating margins but on capital intensity levels, just like Kaufland does,” said Jürgen Elfers head of Commerzbank’s European retail research team in Elsevier Food International’s September 2004 edition. Elfers clearly outlined the impact of Kaufland’s compact hypermarket concept on the competitive markets of central Europe, where leading hypermarket retailers such as Casino (Géant), Carrefour, Cora and Tesco all set up upmarket hypermarkets, on average investing some €28 million to €45 million per hypermarket, which equals average sales per hypermarket of these retailers. “With every euro invested, a store generates sales of €1 at best and on this high level of capital intensity retailers can’t cover their costs of capital,” he said comparing this to Kaufland with its low investment business model. Elfers says this model with its low capital intensities and high sales densities makes Kaufland almost four times as profitable as its competitors.
Piotr Kaszynski, partner and head of Retail at the Warsaw office of property agency Cushman & Wakefield Healy & Baker, explains the increasing attention for compact concepts in Poland by socio-demographic reasons. “Poland is a relatively young retail market which encountered a booming development in the last ten years. Most of the international retailers rushed in and set up shop with large hypermarkets, even before they realised what they really wanted and what formats were really needed where. Big hypermarket formats of Carrefour, Casino, Auchan and the like were successful in big cities, but there are only eight of these big cities in Poland. On the other hand there are some 40 cities with a population of around 100,000 people. Taking this into account plus government regulations which hamper big box retail development, it’s understandable that hypermarket operators in Poland increasingly look at compact concepts.”
Tesco’s strategy
Building smaller shopping malls in medium-sized cities is indeed a trend among developers of retail real estate. In its 2003 annual report, Swedish retailer ICA referred to the development of the compact hypermarket concept in the Baltic States, something which is currently done by Rimi Baltic, the 50/50 joint venture of Kesko and ICA/Ahold. “Rimi changed its logo, internal fit-out and size, decreasing their selling area from 8,000/10,000 m² to some 4,500 m²,” says Mihails Morozovs, general director of Colliers International in the Baltic States. “They put a bigger accent on the ‘fresh & hot’ products, gastronomy and non-packed food items. Last January they had some ten of these stores in Latvia and Lithuania and Rimi Baltic plans to open much more compact hypermarkets under the Rimi Hypermarket banner. Lithuanian retailer IKI also plans to open 20 stores in Latvia this year, some of them will operate as a compact hypermarket of some 3,000 to 3,500 m².”
Last January, The Economist quoted Iwona Krawczyk, market analyst at Carrefour, as saying that in Poland “there are 72 towns from 50,000 to 200,000 which could become a good location for new hypermarkets.” She added that the average size of a hypermarket had fallen from 9,000 square metres to 7,000 square metres.
Commerzbank estimates that in central Europe Kaufland’s average store size has gone down from some 5,500 square metres in 1998 to approximately 3,900 square metres in 2003. In the same period, total selling area soared by 45 per cent annually.
According to Elfers, Tesco reacted fastest to the competitive threat of Kaufland’s compact hypermarket engine. Tesco actively invests in compact hypermarkets in its foreign operations, not only in central Europe but also in Asia – especially Thailand and Korea – where it is not engaged in a competitive struggle with a compact competitor like Kaufland.
Referring to Tesco’s ability to design targeted formats for specific market requirements in its domestic market, Commerzbank is confident that Tesco’s overseas strategy – involving a rollout of compact hypermarkets and building supermarket networks to underpin its market presence – will be successful.
“Through the roll-out of compact versions, Tesco is able to reach a wider customer base in increasingly smaller towns and urban areas,” reads a recent report on Tesco by IGD, the UK-based researcher. “The compact format is therefore the company’s medium-term growth driver as opportunities for the full-scale format in major urban locations decrease.”
According to IGD, in 2003/04 compact hypermarket sales area accounted for 28 per cent of new sales area Tesco opened in central Europe. “In 2004/05, Tesco forecasts that this will rise to 68 per cent of new sales area and we estimate that this will increase further in 2005/06 to 85 per cent of new space additions, the IGD report reads.
Asia goes compact
In Asia a similar trend is visible, especially in Thailand where Tesco has planned the opening of 11 new Tesco Lotus ‘Value’ compact hypermarkets in 2004/05. “Compact hypermarkets in Thailand have an average sales area of 3,500 square metres, compared to a full hypermarket which can have up to 12,000 square metres of sales area,” says Tesco’s spokesperson Greg Sage. “They are located in smaller provincial communities which would not be able to support a full hypermarket format. Because of their cost efficiency they bring a viable modern trade shopping format to these communities.”
Sage says that these ‘Khum Kha’ or ‘Value Stores’ are faster, quicker and cheaper to build. IGD calculates the construction costs as some £3 million, whereas a full-scale outlet in the Bangkok area would cost around £15 million to £17 million. Operating and labour costs are about 40 per cent of those costs in a standard hypermarket, IGD estimates.
In South Korea, Tesco’s development of compact hypermarkets got started after the acquisition of 12 stores last January, three of which are compact hypermarkets, a format characterised by PlanetRetail as the most important growth channel in South Korea.
In Japan, Planet Retail spots a possible strategic shift for Ito Yokado, Japan’s second largest retailer after AEON. In November 2004, Ito-Yokado opened a 4,800 square metre store which allocates over 80 per cent of floor space to groceries and household products. Traditionally, Ito-Yokado focuses on its superstore format with a full line of non-food merchandise. The new store has a strong focus on food and groceries, which last year performed much better than the non-food categories in Japan’s tough business climate. According to PlanetRetail, Ito-Yokado comments that the store is designed to support the everyday life of customers by offering mainly food, household products and limited clothing ranges. “It seems fair to suggest that a concerted roll-out of this new concept will be on the agenda in 2005 if initial signs of success are prolonged,” reacts Planet Retail, who prefers to refer to the store not as a compact hypermarket but as a “supermarket-style superstore”.
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