Kaufland: The Industrialisation of Retailing

The privately owned German retailer Schwarz Group has already expanded its Lidl discount chain to all corners of Europe. Now it's doing the same with its hypermarket banner Kaufland, which is expected to become a dominant player in every market in which it sets up shop.
Elsevier Food International, Vol. 5, Number 3, September 2002
Pascal Kuipers

In July 1999 Dieter Schwarz, owner of the German retailer  Lidl & Schwarz, decided to reorganise his company and to withdraw almost completely from active management. Schwarz separated ownership and management by establishing a limited liability company called Dieter Schwarz Stiftung GmbH with 99.9 per cent ownership but no voting rights, and a limited partnership called Schwarz Unternehmenstreuhand KG with 0.1 per cent of the shares and all voting rights. Total company capital has been contributed to the limited liability company Schwarz Beteiligungs GmbH, under which both operational foundations for hypermarkets (Kaufland) and discount stores (Lidl)

Competitors should not underestimate Kaufland's focus on customers'needs.

are positioned.
In the spring of 2001 the holding company was renamed Schwarz Group and both hypermarkets and discount operations received their own names, Kaufland and Lidl respectively. For the hypermarket operation especially this move came as something of a relief, because it finally ended misunderstandings. Outside Germany in particular, people associated the name Lidl & Schwarz with the retailer's hard discount operations. True, the Lidl discount banner has been expanded to every corner of Europe. But now that Schwarz Group wants to expand its successful hypermarket operation Kaufland aggressively cross-border, it needs to be made crystal clear that Kaufland is a separate and independent business in its own right.

Rapid expansion
In 1984 the first Kaufland hypermarket opened in Neckarsulm, Germany. This 15,000 square metre store was the first link in what was to become one of the dominant retailer chains in the German hypermarket industry. By 2001, there were 289 Kaufland stores and in 2000 - when there were some 265 Kaufland stores in Germany - M + M Planet retail estimated Kaufland's sales level at US$ 4.7 billion.
Statistically, Kaufland opened one store per 3.5 weeks between 1984 and 2000. Last year it grew even faster: Kaufland added 24 stores to its store base, at a rate of slightly more than two weeks per new store.
How is that Kaufland can grow at such high speed in the German market, one that has proved to be so difficult for numerous foreign retailers such as Promo des, Interrnarche and Wal-Mart? Of course, Kaufland is a German company, and, as such, is familiar with local customs and culture. But is this the only reason for the success of this Schwarz Group hypermarket subsidiary, the privately owned company that also owns the Lidl discount chain?
It must be said that history also helped the expansion, which happened mostly in the Eastern German regions - virgin territory after the fall of the Berlin wall in 1989. In 1990, the first Kaufland stores in eastern Germany were opened " ... to offer the civilians basic supplies," as Kaufland says on its website. "By 1998 Kaufland had completed its expansion into eastern Germany, which makes this expansion achievement even greater," says Jurgen Elfers, head of Commerzbank's European Retail Research division. "This aggressive growth could only be achieved on two conditions: a structured and solid management of the real estate portfolio and the financial backing and, secondly, the ability to train and recruit talented store managers."
Elfers acknowledges that Kauflands eastern German expansion was helped by the tax authorities, which granted generous depreciation schemes to investors in the eastern German regions, and the competition. Several retailers were severely weakened or even went bust due to the crowding out of competition in the eastern states of Germany, and had to sell assets. Kaufland's pro active real estate department acquired the outlets, thereby fuelling the company's expansion even further.

Negative net working capital
Kauflands domestic strongholds are in the south - home of the company's roots and where its Neckarsulm head office is located -and the east. Northwest Germany offers most opportunities for growth, and the retailer is currently growing fast there. According to Elfers, Kauflands real estate department is aggressively chasing rental contracts for existing hypermarket locations, intending to snap up contracts due to terminate in the near future from the competition. On its website Kaufland says that Schwarz Objekt Management (the company's real estate department) owns 60 per cent of its selling space, whereas 40 per cent of the outlets are rented.
According to Elfers, Dieter Schwarz is convinced that longer-term ownership of retail real estate provides a competitive advantage. "In the longer term the Consumer Price Index (CPI) increases on average by three per cent," he says. "Rental contracts are linked to CPI development and rental expense increases reflect some 65 per cent of CPI increases. So every year, the minimum increase in rental expenses is two per cent. Remember, though, that increase in rental expenses outstrips sales growth for the industry and a price-aggressive retailer can't afford to pay between 3.5 and seven per cent of sales as rental expenses." On the other hand Kaufland enjoys rental income as well - as the retailer points out, it currently administrates some 3,000 lease contracts for entrepreneurs who set up shop in Kauflands shopping malls or regarding other real estate owned by the Schwarz Group.
Attempting to buy so much retail real estate implies a need for plenty of capital, which then needs to be invested in fixed property. This is no easy task for a low cost/low price retailer, but Elfers makes an educated guess as to how Kaufland manages to achieve this. "One could come up with the idea that suppliers are helping Kaufland to finance the creation of a large retail real estate portfolio," he says, referring to his belief that Kaufland is the only player in the German hypermarket industry with negative net working capital (NWC). "I expect NWC requirements for the other players in the German hypermarket industry to be in the region of between 2.5 and 4.5 per cent of sales. Kaufland actually produces liquidity through its retail trade operations."

Kaufland abroad
Kauflands current domestic store base of 289 outlets may well be expanded to some 350. With an anticipated annual increase in store numbers of between 20 to 30, Germany offers only two to three years for further expansion. That's why Kaufland decided to expand cross border, in particular to the markets of Central Europe.
In 1997 the Czech Republic was Kaufland's first foreign market, when it acquired three stores there from the German retailer Brernke & Horster. M + M Planet Retail reports that Kaufland had to overcome initial organisational obstacles and even public resistance to the opening of the first Kaufland store in Ostrava. Small retailers were afraid of Kaufland's price aggressiveness and blamed the German retailer for price dumping. The Czechs, however, were curious and some of them even travelled as far as 100 kilometres to visit the first Kaufland store. By 1998 Kaufland had opened eleven stores in Czechia and, according to the Czech market researcher Incoma, there were 41 Kaufland outlets in the country by 2001. Again, the company expanded into the emerging Czech market - one that's now crowded with foreign retailers - at an impressive pace. In the Czech hypermarket industry Kaufland is now by far the largest retailer, and much bigger than renowned large surface retailers such as Tesco (UK), Globus (Germany), Ahold (active in the Netherlands with its Hypernova banner) and Carrefour (France). According to lncoma, Kaufland was the preferred place to shop among 12.6 per cent of Czech households in 2001.
From Czechia, Kaufland expanded to the neighbouring markets of Slovakia (in 2000) and Poland (in 2001). In November 2000 three stores were opened in Slovakia and last year Kaufland increased its Slovakian store numbers to 12. There the retailer intends to build a similar store network to the one it has in Czechia. Kaufland's decision to venture into the extremely competitive Polish market underlines the retailer's self-confidence. As a relative late comer to this market, Kaufland needs to fight powerful retailers to gain a viable market position. In Poland, too, rapid expansion will be key to success, so it's up to the real estate department to secure as many locations as possible - either owned or leased. In ate 2001 the first stores were opened and by mid 2002 the number of Kaufland outlets was three. In one of the rare press releases that the secretive German retailer issues (dated February 6, 2002), Kaufland said that it aims to have six outlets by early 2003. But things can change overnight. M + M Planet Retail states that sources in the Polish property industry say Kaufland's fierce real estate hunters have already secured 30 retail locations. This would already equal at least half of Kaufland's target store base in Poland, which is estimated at 60 outlets or perhaps even more.
The Balkan countries of Croatia and Slovenia are Kaufland's next targets. In November 2001 a retail centre in the Croatian town of Karlovac was opened, in which the Schwarz Group had invested US$ 6.9 million. Namnews quoted Kaufland as saying that, in the future, a further US$ 2.3 million will be invested in this centre, which comprises a Kaufland hypermarket employing 105 people and several small shops that will be leased to entrepreneurs. Kaufland also announced that it would open retail centres in Croatia's capital Zagreb and in the towns of Cakovek (Northern Croatia) and Djakovo (Southern Croatia). Slovenia is a small but well developed retail market. Kaufland is said to be interested in setting up shop there, but no information is available on when and how the German hypermarket retailer actually wants to do this.

Success factors
Aggressive expansion based on a keen retail real estate strategy and financed by shrewd management of working capital is an important success factor for Kaufland, both at home and abroad. Expansion is also stimulated by the fact that Kaufland uses locations that are normally considered to be too small for a hypermarket. The smaller stores need fewer car parks, which substantially reduces the acquisition price for land and enables Kaufland to locate its stores much closer to customers than its competitors can do. Kaufland outlets can be found in residential areas and even in inner-city areas where viable. Moreover, Kaufland is capable of constructing stores with car parks on top of their roofs. Efficient logistics are another central pillar to the Kaufland strategy, with the company investing a great deal in state-of-the-art IT and operational structures. Says Elfers: "Improved information systems, data warehousing, a customer card and improved logistical structures are all tools to tap a huge synergy potential." This approach is not only limited to Germany, as Kaufland's operations in Slovakia and Poland are efficiently serviced by the retailer's central hub in Prague (Czechia). Kaufland is a member of the German retail alliance Markant and, via Markant, it's a member of the European buying alliance EMD. Via EMD it can enjoy joint buying benefits. It is also said that, on a purchasing level, Schwarz Group seeks synergies between its discount operation Lidl and the Kaufland hypermarkets. This has not been officially confirmed, however, as Kaufland is said to be a separate and independent business.

Another critical success factor is Kaufland's merchandising ability. "Competitors should not underestimate Kaufland's focus on customers' needs, which the company sees as being offered value for money and efficient shopping," says Elfers. "Furthermore Kaufland is capable of positioning itself successfully in the market, and its merchandising abilities are outstanding. By a clever arrangement of products, Kaufland's managers are able to convey strong product competence, although Kaufland has relatively low numbers of sku's." Elfers says that the new generation of Kaufland stores require some 5,000 to 6,000 square metres of sales floor area. "While food represents some 85 per cent of sales, it actually covers approximately 55 per cent of sales floor area only," he says. "A food module would thus represent some 2,600 square metres of sales floor area on average. Because the stores are relatively small, non food assortments focus on the essential product ranges. Contrary to the non food focus, Kaufland wants to offer total product and price authority in food."
Elfers points to the very clean and structured shopping atmosphere that Kaufland creates and describes its attitude as, ". .an industrial approach towards hypermarket retailing in terms of efficiency, industry standards and management of resources." According to him, this concept enables the Kaufland format to be operated with negative net working capital. "Kaufland is the prime example of industrialisation of retailing on large sales floor areas in Germany," he says. "It could therefore be likely to expand very successfully elsewhere in Europe as well."