In 1994, German retailer Dohle was the first foreign retailer to set up shop in Poland. Since then most large retailers have entered the Polish market, which is on the verge of a dramatic consolidation process. Dohle is the first of the leading hypermarket players in Poland to cash in and leave, in search of new early mover advantage elsewhere.
Elsevier Food International, Vol. 5, Number 4, November 2002
Pascal Kuipers

When Klaus Dohle (1965) was appointed at the helm of German retailer Dohle Handelsgruppe in 1995, he was the third generation of the founding family to lead this privately owned company. In 1995, Dohle Handelsgruppe had just started expanding its operations abroad - to Poland - but in 2002, Dohle decided to sell its foreign assets to UK retailer Tesco. Klaus Dohle denies that his company has returned to a merely domestic status. In his view, Dohle is essentially focused on markets abroad. Richer - Tesco allegedly paid Dohle some € 619 million (US$ 627 million) - and well experienced in cost-efficiently starting a retail operation in Eastern Europe, Dohle is preparing new cross-border retail operations, specifically in Romania and Bulgaria.

Klaus Dohle studied business administration at Aachen University and served several internships in Germany and abroad (a.o. with Superquinn in Ireland and US retailer Kroger). Since December 1995 he is Chief executive Officer of Dohle Handelsgruppe.

Why did Dohle Handelsgruppe sell its well-established operation in the promising Polish market?
"In 1994 we were the first to move to Poland and pioneered there for some four to five years before the large, multinational retailers decided to enter the Polish market. They had a different attitude from ours. We were discount-focused and established a low-cost hypermarket operation in Poland. These big players invested heavily and therefore had a different cost structure. In 1999, we had two long-term strategic options: either to continue independently or to look for a strong joint venture partner to secure a long-term perspective in the consolidating Polish market. We did not want to invest too much money in playing one card - Poland - only, so we decided to search for a good joint venture partner. Throughout 2001 we were in discussion with several retailers present in Poland but after some 12 months of talks we concluded that this was not the right choice either."

For what reason? And whom did you speak with?
"It is no use mentioning names. We were looking for a retailer with experience in successfully managing joint ventures with family-owned partners in different countries. Clearly, experience with family-owned companies is important, because it can be quite difficult for a public company to match the requirements of a private business partner. This joint venture option turned out to be too difficult, as we would have encountered a situation in which Dahle would represent the smaller part in a joint venture dominated by a large retail partner. At that time, we were already profitable in Poland but our various discussion partners were still in a loss-making position as they had started their operations in Poland later. In such a situation an imbalance between the size of joint venture partners becomes crucial. They could easily digest the ongoing losses involving huge investments. We clearly could not. In early 2002, we decided to sell off our Polish operations and Tesco proved to be the most attractive purchaser."

Why Tesco?
"We had spoken to them before, when we still had the joint venture option in mind. Then they made it perfectly clear to us that their objective was to acquire businesses instead of entering into joint venture operations. So when we stopped looking for a joint venture partner and decided to sell our assets in Poland, Tesco automatically became an interesting option again. The reason that Tesco was the best purchaser for our Polish operations lies in the fact that Tesco was best able to include our stores in their network. They also retained most of the staff working in the stores. Thirdly, they were better able to integrate the legal structure of German and Polish companies.

You say it can be quite difficult for a public company to match the requirements of a privately owned joint venture partner. What complicates this relationship?
"Family-owned companies are dedicated to the long term and think in matters of generations or the family fortune. Often a family-member is represented on the board. Listed, public companies on the other hand are focused on share prices and quarterly reports. Their focus is essentially short term. There are examples of successful joint ventures involving both private and public companies, but in general I think that the large and listed companies have a better match with their public peers."

Do you think that large, listed retailers want to acquire their smaller joint venture partners in the long run?
"Yes. In such a position you must always be keen on making sure that they don't get the opportunity for a takeover, if you want to retain your independence."

Is Dahle considering starting a new operation abroad?
"Yes. We were successful in Poland and now we are experienced and knowledgeable on how to set up a business in Eastern Europe. We have plans to go abroad again and we are focusing on this region, especially Bulgaria and Romania. In searching the right market, we are looking for possibilities to purchase products locally, eventually in cooperation with farmers. This is a prerequisite to be able to sell cheap products and meet local price levels. We are also investigating the potential of store formats dominated by food offers and of course the availability of real estate. The stores must be accessible by car and public transport and the locations must be close to the concentrated urbanised areas."

Do you also monitor consumers' attitudes towards state-of-the-art retail formats from a foreign company?
"East European consumers in countries that still lack a modern food distribution system are used to shopping in open-air markets and government-led markets and stores. Local clientele must become acquainted with modern outlets. In Poland, we experienced that first the people with higher disposable incomes come to the stores and that other people soon follow in larger numbers. I expect a similar scenario in Bulgaria and Romania. In Poland we really started from scratch and had to bring the products in because the country lacked any professional food distribution system and structure. In these Balkan countries, however, there are already local food retailers, which means that they have already established some kind of structure for sourcing products locally. These local retailers can also be interesting companies for us to acquire and rapidly build a store base providing enough critical mass to cover the initial investments."

In Poland, it took some years before other retailers followed but in Romania, for instance, big players like Carrefour, Delhaize and Metro AG are already represented. Will Dahle again expand abroad on its own, or is a joint venture with one of the large international retailers an option?
"That's too early to assess at this moment. We intend to start our operations in Romania and Bulgaria by mid-2003 and our strategy abroad depends upon how successful we are in these markets. In the longer term, we also see the Ukraine as an interesting market in which to set up shop. Whether we do this independently or in a joint venture is something to decide in the years to come."

Is expansion abroad vital for Dahle to achieve its growth targets? Are there sufficient growth opportunities in your domestic market Germany as well?
"Expansion abroad is very important. It is easier to expand abroad than in a saturated market like Germany. In our domestic market, however, there are also opportunities for us to expand. We are very strong in the western and southern part of Germany and we see plenty of opportunities to add more stores to this domestic stronghold."

Foreign retailers that started operations in Germany all ran into trouble. What makes the German market so difficult?
"Compared to other markets in Western Europe, Germany has the most square metres of selling space per inhabitant. This massive overcapacity puts pressure on sales and profits per square metre. Furthermore, Germany has a history of discount selling which makes the market - and its customers - essentially price driven. Everybody works on a price strategy and no German retailer makes a lot of money in Germany alone. When a retailer is a new entrant to this low margin market, it is almost impossible to compensate the start up losses. To do this you really must have a long-term commitment.
Service and quality are means for differentiation, but they must be affordable given these market conditions. German consumers have been educated to be price focused. For them food quality is not a major point. With our HIT stores, we try to differentiate ourselves with quality and service, but always with a keen eye on our cost base. We are a German company and we know the German consumer. We focus on quality and service but up to a level you can work with in Germany. Not too high and at the right price."

The German trade press criticises Dahle for not having the right price image due to relatively poor purchasing conditions. Is that true?
"I disagree. We have a good price position that suits our goals perfectly. We are a medium-sized company working hard to get the right purchasing prices. Suppliers, however, are getting bigger and bigger and if you do not belong to the Top 3 of retailers it is difficult to realise the right purchasing price. We are a member of Markant in Germany, but that offers more synergy on the organisational side than on purchasing. Suppliers that deal with
Markant also have to visit the Markant members individually when they discuss purchasing conditions. That is indeed not very efficient but it has historically grown that way. To make sure we have enough buying clout we are thinking about jointly purchasing with other retailers. Markant helps us in combining these forces. Foreign retailers could be involved as well. Markant is a member of the strategic alliance EMD."

Another point of criticism: it is said that Dohle did not pay enough attention to Human Resource Management, meaning that the company is lacking the right managers to push the company forward in its domestic market. Is that true?
"At all levels - from our headquarters to the stores - we employ ambitious managers. Our HIT superstore concept led the 2001 German Client barometer, which monitored overall customer satisfaction for a five-year period (from 1997 to 2001). We are doing a good job. Our management is well positioned and we invest in HRM. We attract young and ambitious people for our expansion in both Germany and abroad. We are an attractive employer since we have a track record of successful food retailing. We offer a secure working place in a family-owned company with a culture based on long-term values. Our German managers who worked in Poland and returned to Germany after we sold our Polish operations, are keen on working abroad for us again. We retained these experienced people and they will be invaluable to us when we start our operations in Romania and Bulgaria."

You recently said that stores with selling space of 4.000 square metres are ideal for HIT. How would you describe Dohles dominant future format: a HIT hypermarket (food and non food) or a HIT superstore (focus on food with non food playing a secondary role)?
"HIT is our main brand. We have a single format and a single brand. In Germany HIT is a superstore with an average selling space of 3.500 square metres and an assortment dominated by food with a limited non-food offer. Abroad, HIT is a smaller type hypermarket, also dominated by food. With a selling space of some 5,000 to 7,000 square metres, this will be the winning format in Bulgaria and Romania. Currently, hypermarkets sized 10,000 to 12,000 square metres are simply too big for these markets."

How do you see the future perspective of privately owned companies in consolidating international food retail business? Is it not true that listed companies with access to the financial markets of the stock exchange will dominate this industry in the long term? What is the perspective of Dohle Handelsgruppe in this respect?
"Flexibility is our main advantage. We do not always have to do the right thing for the short-term stock price. We keep an eye on the long term. However, I do not rule out that we will ever consider going public. US retailer Marsh, for instance, proves that going public can be a good option for a family business. Maybe such developments are also possible in Europe. Currently however, food retailers' stocks are no darlings on the stock exchanges. We have plenty of opportunities to finance our growth policies. We will certainly make good use of the funds from the Tesco deal and we are also speaking to banks and private equity investors."