Les Mousquetaires coming full circle?

Being big in France doesn't necessarily mean being big in Europe - not even if you've managed to acquire the eighth largest retailer in Germany. French retailer Les Mousquetaires clearly has cross border ambitions, but has seen these thwarted by problems at home and abroad.
Elsevier Food International, Vol. 5, Number 1, February 2002
Pacal Kuipers

All for One, One for All: This spirit was obviously missing at French retailer Leclerc back in 1969, when the 75 affiliates who disagreed with Leclerc's plans for a nationwide distribution system decided to establish their own group of independents. Acting along the lines of this spirit, they opted for 'Les Mousquetaires' (The Musketeers) as a name for their new group and started trading their stores under the banner 'Ex'.
The Musketeers currently comprise some 2,400 independent retailers, most of them franchises under the Intermarché banner. Each member can operate a maximum of three Intermarché stores and the licence is tied to the individual, not the store. Real estate is owned by the independents, which pay a monthly sales-related fee for their membership. Furthermore the members must devote one third of their working hours to The Musketeers' central office, lTM Entreprises.
lTM Entreprises is responsible for central buying, own-brand production and logistics. It manages the company's 30 to 35 production plants where 2,200 private label products are manufactured (private label accounts for about 33 per cent of the retailer's sales in France). This is an important asset to this somewhat autocratic retailer, which even owns a large fishing fleet. lTM Entreprises also offers services (such as training, legal aid and financial consultancy) and implements The Musketeers' corporate strategy, which is designed by its controlling organ SCM (Société Civile des Mousquetaires). SCM consists of about 900 Musketeers.

Second largest
On this basis, 'All for One, One for All' was developed over the years. The Musketeers are now Europe's second largest food retailer representing a total sales level of €36 bn (US$ 31.8 bn) in eight countries in Europe. France is still by far the most important market to The Musketeers, accounting for over 70 per cent of total sales. Here, The Musketeers own about 3,700 stores under eight different banners: four food retail banners, one restaurant banner -Resteaumarché - and the remaining three banners, which focus on non-food: Bricomarché (DIY and gardening), Vetimarche (textiles and clothing) and Stationmarché (car specialist stores with service departments).
Outside France, Bricomarché and Stationmarché are The Musketeers' only non-food banners. There are six, nine and 16 Bricomarché outlet in Portugal, Belgium and Poland respectively. Stationmarche's cross border presence is limit to eight outlets in Portugal only. It is, however, food retail - and lnterrnarche in particular - that drives the foreign expansion of The Musketeers, with Intermarché present in Spain, Portugal, Italy, Belgium, Poland and Germany. In Bosnia the company opened an Interex Cash & Carry store in September 1999 and it plans to expand the store number to three by the end of 2001. Early in 2002 the first Romanian Intermarché expects to open, and the French are also said to be interested in setting up shop in Russia and Slovakia.
Ecomarché clearly has less cross border potential as it is represented in only two countries outside France: Portugal (45 stores) and Belgium (20 stores). The discount banner Netto - developed by ITM's German subsidiary Spar AG - must provide The Musketeers' growth in France and abroad, specifically in Spain, Portugal and Poland. In Germany there are already some 850 of these Netto discount stores. This red-coloured Netto concept - which is clearly distinguishable from the 174 black/yellow Netto discount stores operated by Spar AG in the east of Germany in a joint venture with Oansk Supermarked - is being used by the French to rebrand its flagging discount business in its domestic market. ITM's discount banner COM proved incapable of competing with France's leading discount chains Lidl, Aldi, Ed (Carrefour) and Leader Price (Casino). Some 220 of them have now been rebranded as Netto. There are, however, differences between ITM's Netto hard discount operation in France and the Netto operation of ITM's German subsidiary Spar AG. These differences include size and merchandising and - most important - ownership structure: the German Netto is owned by Spar AG and therefore is an integrated retail chain, whereas in France Netto is managed by independent owners who franchise this hard discount concept.

International Expansion
The Musketeers' president, Pierre Gourgeon, stated in the October 2001 edition of the French trade publication Linéaires that future growth can only be established by international expansion. "Being strong in its domestic market before departing to new horizons and developing its business via concentric circles are two principles that are key to us," Gourgeon said. Indeed ITM is strong at home, with France accounting for 70 per cent of total sales. The Musketeers' domestic stronghold, however, seems to be in decline. Foreign to ITM's self-supporting nature, the retailer was forced to outsource a large part of its logistics because The Musketeers' warehouses were not capable of dealing with the rapidly increasing number of product items. In order to catch up with its competitors, ITM signed multi-year contracts with several logistic service suppliers. "This decision is not a strategic but a tactical opFon," said ITM's logistics chief Jean-Marc Léva in the French publication LSA in June last year. "Only the urgency of this matter convinced us to work with third parties." LSA indicates that due to ITM's insufficient storage capacity, two or even three different product items were stacked up, which led to a dramatic decrease in the effectiveness of order picking and to poor working conditions for the order pickers. Logistic troubles have their effect downstream and inevitably create out of stocks and dissatisfied customers in the stores. Merchandising in general is a problem for The Musketeers, who allocate too much shelf space to private labels, to the detriment of national brands. This limits the perception of variety and choice amongst Intermarché customers who cannot really assess if The Musketeers' slogan, "Always at war with an expensive life" holds true, by comparing the price levels of national brands with The Musketeers' competitors. "When Auchan is credible for its variety of choice, Carrefour for its state-of-the-art stores, Système U for its commercial sense and Leclerc for its low price level, what domain remains for Intermarché to really distinguish itself in?" Linéaires commented in August 2001. An obsolete store network aggravates this image problem. ITM has not succeeded in convincing the independent Musketeers to invest in the modernised concept it developed for Intermarché. This new concept, which was unveiled in late 1999, is based on an ideal surface of 2,000 square metres and allows more variety than the traditional Intermarché outlets, which were designed to fit a space of around 1,200 square metres. 18 months later, however, only 15 per cent of the Intermarché Musketeers adopted the new concept, and some of these only to a very limited extent. "Due to French law, increasing a store's sales surface is a time consuming effort," said an ITM spokesperson. "But this process is progressing and the enlarged stores have turned out to be very beneficial."
Unlike affiliates of other independent retailers like Leclerc and Système U, most Intermarché retailers are inward focused and lacking entrepreneurial spirit, comments Linéaires, quoting an anonymous Musketeer: "At lnterrnarche the owners consider themselves more often as administrators of a patrimony instead of as grocers."

Sense of frustration

"Being strong in the domestic market before departing to new horizons..[is] keu to us." Perre Gourgeon

Those Musketeers who still are keen to drive a grocery business can be frustrated by this situation and -independent as they are - may decide to turn their backs on ITM. This is especially the case for Systerne U, which is renowned for its commercial spirit and appears to be attracting a lot of new affiliates coming from the ranks of The Musketeers. Its hard discount banner Netto is also a catalyst in this process. As discussed earlier, ITM rebranded its French hard discount activities under Netto and since June last year has undertaken a huge promotional campaign for the stores. Currently there are some 220 of them and ITM is aiming to build a store base of 400 by 2003. ITM claims that a Netto discount store starting with a sales area of 300 square metres will break even once it reaches a sales level of €1.3 million, a figure that's enough to cover the cost of a Musketeers couple assisted by three employees. This is the first stage, which lasts 18 months on average. In the second stage, the store will be increased to its standard size of 600 square metres, which is translated into profitability starting at a sales level of between €I.8 and 2.3 million.
This calculation is, however, too general for a lot of locations where the risk of internal competition is significant given the density of ITM's store network all over France. Actively stimulating the number of Netto entrepreneurs might well rub up the Intermarché Musketeers the wrong way. The connection has not yet been proved, but by July 2001 - one month after The Musketeers started their Netto campaign - the number of Musketeers that had decided to join Systerne U was already unusually large. As LSA puts it: "A slump is moving through the ranks of Intermarché's members, particularly in the western region, as they're seeing how Systerne U is gaining market share."
"Every year there are any number of changes in Intermarché:s store base, which consists of over 1,600 outlets", an ITM spokesperson responds. "This is, however, limited to some ten stores and is therefore not alarming for The Musketeers." ITM also discards the suggestion of internal competition, pointing at a good performance from Netto. "The six months since the change from COM to Netto, which happened in June 2001, sales increased significantly (on average over 15 per cent).
In France, the Netto stores are managed by independents in two ways: about 20 per cent of the store base is run exclusively by member couples and some 80 per cent of the Netto stores are managed by member couples that also own another lnterrnarche store. There is no competition whatsoever between lntermarche and Netto because their concepts are totally different. Netto's performance, plus the fact that increasingly members choose to manage a Netto store exclusively, prove that Netto is a viable concept which appeals to customers." Appealing, but also challenging - since the Netto independents must compete with multiple hard discounters like Aldi and Lidl, which operate very cost efficiently in the slim-margin hard discount business.

Trump cards
Despite these problems at home, The Musketeers' reckon that their domestic position is strong enough to allow them to embark on an ambitious expansion plan abroad. The domestic and international ambitions as expressed by Pierre Gourgeon are shared by ITM's boardmember Jerome Descateaux. "Capital and people are the trump cards in the international development of a group of independent retailers like ours that isn't pressurised by shareholders," he said on 23 October of last year, during a conference on international retailing organised by LSA in Paris. "We are an integrated group and use our cash flow downstream - to support the store network - as well as upstream, for instance, to invest in IT systems. Our people display the power of independent retailers that are capable of adapting to local requirements. That's why we are succesful in countries like Portugal and Poland where our sales per square metre are high."
The focus is on organic growth and ITM is constantly searching for new Musketeers to join the group. But Descateaux also points at acquiring a stake in other companies, as ITM did in 1997 when it acquired a minority share in the Canadian DlY company Rona and - more importantly to The Musketeers' core business ¬a majority share in the German Spar Handelsgesellschaft. The Spar acquisition pushed ITM's foreign business share forward and immediately lTM decided to centralise international purchasing as well by establishing Agenor, whose focus is on food buying, and Arena, which focuses on the purchase of non food items, specifically in the home improvement sector.
Agenor has not been as successful as expected by ITM, which predicted in 1997 purchasing benefits of 3.5 per cent of ITM's total turnover by 2000. To reach this, The Musketeers' European leverage should increase dramatically, but that has not yet happened. ITM's spokesperson remains vague when asked about Agenors performance: "Currently we want to continue our international development in Europe. The arrival of Spar AG in The Musketeers only speeded up our desire to put a centralised international buying agency in operation."
First a strong international presence needs to be built and then this can eventually be turned into a strong European buying centre. However, in Spar Germany ITM acquired a gravely ill retailing' asset' - a loss-making myriad of businesses and banners that drastically needs restructuring. Cash & Carry, non-food discount, petrol stations and B2C E-commerce are (or will be) divested and Spar AG will focus on its core activities of wholesaling and food retailing with its leading banners Intermarché, Eurospar and Netto (hard discount). In 2000 a conversion plan was put into action, which aimed at privatising some 170 Eurospar stores and transforming them into lnterrnarche stores, owned by independents. This plan was to be completed in the autumn of 2002, but by the summer of 2001 Spar AG had stopped the process, which was far from well-organised. Currently 68 former Eurospar stores have been transformed into Intermarché. Despite the sale of its 111 Kodi non-food discount stores in December last year, a lack of funds is the major concern for Spar. CEO Fritz Ammann is confident that Spar will have recovered by 2003, but financial support from ITM is badly needed. ITM is said to have invested some OM 4 bn (US$ 1.8 bn) in Spar AG since it acquired its flagging German asset back in 1997.
"Now 36 per cent of our sales are outside France," ITM's spokesperson declares.
"Firstly, we seek to continue our development in the countries where we are already present - in particular in Poland and Portugal. Furthermore our objective is not to neglect the opportunities offered to us in emerging markets such as Bosnia or Romania."
There's still plenty of work for The Musketeers to do, since their cross border position remains vulnerable and low-key. There is, however, yet another option to increase leverage on the short term, as Descateaux indicates: "We currently represent a sales level of €36 billion, but alliances with other groups of independents offer a potential of €100 billion." However, this would include co-operation with domestic competitors like Leclerc and Systerne U. Whether this will happen remains to be seen the idea of joining forces with Leclerc, from whom The Musketeers originated 33 years ago, would once have seemed unthinkable. But, in times of consolidation, anything is possible.