Baugur Speculative Retailing
After years of rapid growth, the young and ambitious Icelandic retailer Baugur is confronted with setbacks in its core business retail. It expanded abroad to Scandinavia, the US and Britain. By selling an asset in the latter market, it scored an exceptional gain to make up for operational losses.
Elsevier Food International, Vol. 6, Number 2, May 2003
Jim Cordts
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Hankaup introduced the supermarket concept in Iceland and acquired a 50 per cent share in Bónus(1992). In 1998 it merged with Bóbus into Baugur. |
Half an hour later the bus arrives in Iceland's capital Reykjavik, the bustling, trendy capital of one of Europe's most exotic countries. Modern shopping centres, art galleries, chic restaurants, a booming nightlife, you name it. It is all there. Even traffic jams. Who would ever want to leave this small exciting island in the North Atlantic where the sun hardly ever sets during those short but wonderful summers? And is it not a wonderful location for retailers as well?
Small and competitive
Iceland is a country of extremes. With a population of only 300,000 - most of them descendants of the Vikings who arrived in the ninth century -Iceland's standard of living is one of the highest in Europe with unemployment rates belonging to Europe's lowest levels.
When it comes to retailing, competition is just as fierce as anywhere else on the continent. Three groups - Baugur (45 per cent), Matbaer (l5 per cent) and Kaupus (30 per cent) -compete vigorously and compare prices on a daily basis. Because the Icelandic retail market is very small, it is even more difficult for companies to make headway.
Iceland's largest food and general merchandising group is Baugur, a company established in 1998 by a 29-year-old with a vision, Jón Ásgeir Jóhannesson. Again first impressions can be deceptive. At first glance Jón Ásgeir Jóhannesson, now 35 years old, speaks softly, and acts in a quiet, reserved and even shy manner. However, when it comes to business he is just as aggressive as his Viking ancestors were in their time. In the last five years he has expanded Baugur's operations from Iceland to the neighbouring Faroe Islands, the UK, the US and Sweden.
"The market in Iceland is just too small," says Johannessen. "The only way for Baugur to achieve growth is via foreign expansion. That's why we designed a growth strategy focusing on expansion into the UK, the US and Scandinavia." In the last two years Baugur invested over £50 million (US$78 million) in the UK. Recently it increased its share in several British retailing groups such as Big Food Group, Somerfield, Mothercare, House of Fraser and Selfridges. Baugur owns the franchise rights of several banners that belong to these companies.
Introducing discount
With a father and a grandfather owning a grocery store in Reykjavik, 21-year-old Jón Ásgeir Jóhannesson followed a family tradition when he and his father opened their first small store called Bonus in 1989. Before this, he travelled throughout Europe where he witnessed a growing number of discount stores. He decided to introduce hard discount in Iceland and since then the Bonus store offers a limited assortment of 1,000 items at low prices. "We were able to offer low prices at that time, because we paid the wholesalers and vendors in cash," Johannessen says. "We also had shorter opening hours, which reduces cost. The common practice in those days - payment wise - was that wholesalers lent the stores money, tax-free, for some 42 days. Hence, the wholesaler still owned the merchandise."
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“The only way for Baugur to achieve growth is via foreign expansion. That’s why we designed a growth strategy focusing on expansion into the UK, the US and Scandinavia” |
The Bonus store was a success and land marked the beginning of a revolution in the Icelandic food retail business. Bonus expanded quickly into a chain of five stores in 1992, when Iceland's largest food retailer Hagkaup acquired 50 per cent of the shares in Bonus. This provided Bonus with enough funds, know-how and leverage for the young company to stay. A year later Bonus and Hagkaup established a joint-buying operation named Baugur. In 1997, they built a state-of-the-art warehouse that could handle both dry groceries and fresh and frozen products. Bonus and Hagkaup merged in 1998 and Jón Ásgeir Jóhannesson was appointed president and CEO of the new company also named Baugur.
A year later, the company was listed on the stockmarket in Reykjavik with Johannessen taking a controlling stake through his family company Gaumur. Baugur quickly became the market leader for food sales in Iceland through its Hagkaup supermarkets and department stores and the hard discount Bonus chain. In 1999, the company bought the convenience store chain 10-11 that more or less completed Baugur's expansion plans in the food sector.
Diversification and foreign expansion
"Our market share is approximately 45 per cent and regulations don't allow us to grow anymore," says Johannessen. "So we have diversified into non-food and general merchandising operations in Iceland through both acquisitions and franchising agreements. We have also started foreign expansion. "
Today, Baugur has 74 stores in Iceland. Once again a small number by European standards but huge in Iceland. Besides the food stores it has branched into sporting goods (Utilif chain), pharmacies (Lyfja chain), and fashion and clothing through its Debenham, Topshop, Miss Selfridge and Zara franchise stores. Cross-border activities started in 1999 through acquisitions in the Faroe Islands and the US. In Scandinavia, the company has opened 11 fashion stores in Sweden, including a Debenham's department store in Stockholm. Next year Baugur plans expansion of Debenham's by opening a store in Copenhagen, Denmark, and Oslo, Norway. It also owns the franchise rights for Debenham's and Arcadia in the Baltic countries. As yet, however, it has not revealed any plans for expansion to these countries.
The most spectacular deals however were made in 2001 when Baugur entered the markets in the US and Great Britain. For some US$30 million Baugur acquired a 51 per cent majority share in the flagging US retailer Bill's Dollar Stores. The chain then had 410 stores in 13 states and owned a distribution centre.
Earlier in 20m, Baugur had invested a smaller sum of money in 20 similar Bonus Dollar Stores in Florida, and these were integrated into the new company. Dollar Stores in general became one of the fastest growing segments on the' American retailing scene and Baugur's entry into this market gave the company increased buying power to benefit even its stores in its domestic market Iceland.
This, however, is not enough to turn red figures into black ones. In 2002, Bill's Dollar Stores performed disappointingly with losses of some US$15 million. Baugur is currently undertaking a drastic reorganisation. Last year, nearly 50 stores were closed and currently the stores in Florida are for sale. Baugur increased its stake in the US chain to 63 per cent and is rebranding it to Bonus Stores. It will also introduce more food products into the US Bonus Stores, which are now managed by a new CEO, Jack Koegel from Target. All this should turn the US operation into a profitable business next year, but Baugur still has reservations as it states in a press release of November 2002 that "The trading environment in the US is extremely difficult. Public confidence in the US economy has been waning and there are expectations of reduced growth. Also, there is fierce competition among discount stores. On the positive side, discount stores are generally expected to benefit when economic conditions deteriorate."
Speculation strategy
In 2001, Baugur acquired a 20 per cent share in UK fashion chain Arcadia via its Investment & Development (ID) operation. Arcadia owns retail brands like Topshop, Topman, Burton's, Miss Selfridge and Evans. This deal proved to be highly profitable. During, 2002 Baugur ruffled quite a few British feathers by making a bid to take over Arcadia entirely. This deal though, was never clinched. Instead, Arcadia was sold to the British billionaire Philip Green, who also bought Baugur's 20 per cent of the shares for £71 million (US$111 million).
Baugur therefore walked away from Arcadia with a huge profit of GBP 55 million (US$ 86 million), money that is now being reinvested into the UK retailing scene. Jóhannesson feels that the UK retail sector is massively undervalued. "The UK retail market is in a better shape than market experts ponder," he says. "It's public knowledge that the price of UK retailing companies is at its lowest for 28 years."
Baugur built a strong stake in the retailer British Food Group that operates the underperforming supermarket chain Iceland (over 400 stores) and the Bookers Cash & Carry with 178 units in the country. Baugur bought 15 per cent of the shares in late 2002 and has recently increased its stake to 22 per cent. It also acquired three per cent of the shares in the supermarket chain Somerfield and has started building stakes in the department store chains House of Fraser (eight per cent), and Selfridge (0.5 per cent).
After investing a total of GBP 55 million (US$ 86 million) in assets in British retailing, Baugur is betting on a continued consolidation of the UK retailing scene that will drive the prices of these chains up through buyouts allowing Baugur to sell at a handsome profit. So far, this speculation strategy seems to be working as the bidding for UK retailer Safeway demonstrates. At home, expansion has more or less come to a standstill as the company's market share has come under scrutiny. The last major investment was in 2001 with the opening of Iceland's largest hypermarket - a 10,000-square-metre Hagkaup store - and a 4,500-square-metre Debenham's in Iceland's newest shopping mall, Smaralind, on the outskirts of Reykjavik.
Baugur is still expanding in Scandinavia (Sweden, Denmark and Norway) but has no plans on starting food stores there. "To succeed financially in the food business you have to be one of the Top 3 companies in the market," comments Jóhannesson. "This is a position we cannot achieve in these countries."
However, Baugur, which runs the pharmacy chain Lyfja in Iceland, could become involved in the pharmacy sector in Scandinavia as the GTC-market is being liberalised in Denmark, Sweden and Norway. One of Baugur's largest shareholders - the Norwegian Reitan Group with ten per cent of the shares - is examining the possibility of setting up stores for GTC sales.
Baugur will therefore be very active in the future and this is needed now its core retail business is under pressure. If the company's speculation game in UK retailing shares pays off, it can financially fuel its ambitions. Whether speculation will payoff though, remains to be seen. However, two things are certain: for Baugur necessary growth in Iceland is impossible and Jón Ásgeir Jóhannesson is not planning on retiring.
Jim Cordts is a journalist with the Swedish trade publication ICA-nyheter, published by ICA Forbundet that is part (30 per cent) of the ICA-Ahold joint venture.
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