Mercadona and Discount Food Retail

How has the Spanish supermarket industry structure evolved over the last decade?

Yes. We need to go back to the years 1985, 1990 when the hypermarkets appeared in Spain. I mean, the Spanish market was always driven by hypermarkets and then the French players like Carrefour and all of them began trying to expand all across Spain.

There were some Spanish players already doing some supermarkets, not hypermarkets, and then some of them got afraid and sold the business. Mercadona took the approach the approach and said, "Yes, I need to go to the US market and then try to understand how I could design myself from somebody like these hypermarkets," and so they went away and we work the foundation of Mercadona that we will discuss later on.

Mercadona, today the leader in Spain with 25% of the market, they were local guys in Valencia with a small supermarket and even the family of the current owner, second richest man in Spain was a butcher's family. As time elapsed, then the Spanish government, what they did is they decentralized the obtention of the commercial license. They were doing this especially out of a strong pressure from the Catalonian government, but they have always had a very strong opinion into retailing in Spain because the Catalonian guys, I mean, if we look at trade or retail, Catatonia has always been very, very strong.

They wanted to defend the small and local shops, so they pressured the Spanish government to decentralize the licenses. And then basically, the regions decided no more hypermarkets. They said, "Now it needs to be a supermarket," mid-size supermarket.

We have 17 autonomous communities in Spain or regions with 17 governments, so not all the ruling is such in the same way. For example, Madrid is extremely open to business, and we can open 24 hours, and then there's these licensees and so on, but in Catatonia it's impossible, you can't open on Sundays and very limited.

What has happened is that this has created a very, very different shape of development of the retail market across Spain because some regions basically were extremely protected. Catatonia would be like Italy, where hypermarkets are not present because the Italian ruling is very tough, but then Madrid would be like France, full of hypermarkets because nobody was stopping them from opening.

Mercadona took the advantage, this double advantage. The first one, of course, of assessing what was going to happen and then really setting up a clever business but at the same time suddenly the whole laws says that no more hypermarkets, so then only mid-size supermarket which it was exactly what Mercadona was doing. It got a little bit of win in favor.

Then we got a second phase that is the crisis, in the year 2007 to 2009, everything was glorious in Spain. If you look at the amount of cars we were buying per year is twice the amount of cars we're buying today. We went from two million cars per year we went then down to half a million cars and today we are a million, a million and 200,000 cars. We were believing we were richer than the Germans.

But the crisis hit us very heavy mainly because the Spanish economy was very much based in construction, and these markets just collapsed, it disappeared. When you have something that represents somewhere around 20% of the economy and you're pushing everything behind, banks with problems, with mortgages. Then on the real estates, what happened is that people moved from, let's say, the high-end regional leaders, very nice construction firms into this campus, again, this helped Mercadona.

I remember some friends of my wife who never went to a discount and then they said to me, "Javier, we met some Mercadona," because they actually started to-- and this, it was another win in favor of Mercadona that even the crisis, not only hypermarkets were stopped and then the format was good, at the same time the consumption was moving to these counters, so this was a big time for Mercadona.

How did the market change in terms of store count or square footage?

The reality is that if Spain has always been very steady even here in the crisis, we have every year somewhere between 2% to 5% new ascend space. This sounds a little bit strange because the market during the four or five years of the crisis was decreasing, but just who was up in there and it was Mercadona leading, so the discounters and Carrefour was also quite okay.

Let's say the leaders of the sector have never complained, have never ever really, perhaps they review the speed of openings. I remember Mercadona, at peak times, were opening 100 stores per year and then they went down to 60, but they were still open. This is part of what we have discussed on the past in Spain. The concentration of the top players it's happening but it's happening because the good performers continue to open. It might seem reckless because in terms of the space we don't need any more space but the thing is that they're killing the non-performers like DIA and Eroski. In a way, it's a strategy, I'm sorry.

Mercadona, which has roughly 25% of the market today. What was the market share split between major players in 2008?

Before the crisis Mercadona was somewhere around 20%. You had for example Eroski with much more relevance. Eroski prior to the crisis were €9 billion company. Today they are €5 billion company. They've lost 4 billion, they've lost 60%, sorry 40% of their sales. Now, this has gone to other parties. For example, these were parts of the players that lost. There are others like for example, regional leaders who had to close down and they were taken to liquidation. All in all the shift you have let's say two kinds of shifts.

One which is winners or losers, and I gave you names of the winners like Mercadona, Lidl and Carrefour. Losers would be people like Eroski, DIA or some of the originals that were not too good. In terms of format clearly, we've moved from big surfaces outside town into convenience downtown. The curious thing is Mercadona has also closed many of their out of town stores and moved also downtown. These shifts from outside to inside.

What exactly is driving consolidation the market? We touched on Eroski and DIA getting squeezed out but what is driving this?

Well, I have this rule, which is the rule 80/20. The rule which is very simple to understand. 80% of the pros that retailers are holding today are commodities. Non-attractive based on price and that at the end, you need facilities to be touched. Those ones will eventually be on the hands of digital players or the digital market. I'm not saying that today that's not been standing, there's still a square space for - but then you have the other 20%, which is differentiators. Things that really motivate you to go there. At the end, good players are having a significant junk of this 20%.

Perhaps not 20% but 30 or 40% within their stores and they continue to innovate and generate new things. On the other side, then you have people who this 80% becomes 90% and because they're simply not innovating, they're not really novelties. They're focused on to commodities and at the end, then the decision for going one on stores is based on your price and commodity. This is not a long lasting let's say advantage.