Dino Polska: Growth Runway & Competition | In Practise

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Dino Polska: Growth Runway & Competition

Former Purchasing Director at PoloMarket & Former Purchasing Director at Lidl Poland


Executive Bio

Former Purchasing Director at PoloMarket & Former Purchasing Director at Lidl Poland

This executive has 25+ experience in the polish retail market, having served as purchasing director at a number of grocery retailers including Lidl, EKO Holding and Polo Market. He follows Dino's performance closely and actively consults on the market,Read more

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Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

Thank you for taking the time, greatly appreciate you signing on. As a brief background, I run a very concentrated global fund and currently have a position in DinoPolska. We're hoping you can give us some interesting things about the Polish grocery market and learn more about Dino?

I hope so. I have been in the Polish retail market for over 30 years, mainly in the buying department. I work for the biggest retailer and spend a lot of my time analyzing all the competitive players in the Polish retail market, especially Dino, who I know from the very beginning 30 years ago when Mr Biernacki opened the first stores in Poland.

Given your wide background, how does the Polish market differ to the other markets you have seen. Are there any unique features as it relates to food retail and grocery chains in Poland?

In the 1990s, we saw many changes connected to the political background in Poland. It became more concentrated and organized. Although there have been some changes over the last 20 to 30 years, the Polish market is still not very concentrated. Poland has modern trade, with organized chains such as Biedronka, who are the biggest retailer in Poland with 3,500 stores. We also have all the big players in the discount area such as Lidl, Aldi and Netto. There are also hypermarket such as Auchan, Kaufland and Carrefour, as well as supermarket stores such as Carrefour and SPAR. In addition to those, there are Polish owned stores such as Polomarket.

The organized portion is approximately 30% to 35% of the total retail market, so there remains a strong non-organized retail. There are many single private food stores. Many years ago, you could buy fresh fruit, vegetables and meat directly from producers, which remains part of the Polish retail market. If we want to focus on the modern trade, and specifically Dino, they currently have 1,700 stores and are the most dynamically developing retail company in Poland. Their store size ranges from 350 to 550 square meters with a parking area, 90% of which are newly built. When it comes to the assortment range, Dino has 3,200 to 3,400 SKUs which is 1,000 more than discounters such as Lidl or Biedronka who operate with 2,200 to 2,300 SKUs in their regular assortment.

If 65% are still mom-and-pop stores, what is the future for those stores? Could they be consolidated into a Biedronka or Dino over the next five years?

There is no future for those stores but Covid has given them a lifeline because, from a customer perspective, they remain a very convenient solution. If the standard of those stores is acceptable to Biedronka, they could buy them, but there are also many small local store chains of 10 to 20 locations who operate under one logo and have one private owner. These are slowly being sold to the biggest operators. In the past few months, 100 stores were sold to Eurocash, who are the biggest Polish wholesaler. They are developing an operation in cooperation with private stores on a franchise basis where a private owner signs a contract with a big operator like Makro cash-and-carry or Eurocash, and operate under their own brand but with their assortment and delivery made by Eurocash. Today, Eurocash deliver to 15,000 of these small private stores, which makes them much more organized.

Just to clarify when you say unorganized market, are you talking about the small mom-and-pop stores with one store and one owner, and the organized market has 10 to 15 stores with a private owner, and that those are gradually being sold to bigger operators? Is that a fair summary of those markets?

That is the trend because private stores are no longer attractive compared to Biedronka or Lidl and need support from Eurocash to give them better buying conditions. They offer promotional support and allow then to better communicate with their end customers. One specific situation in Poland is the Żabka convenience chain stores which are very small, between 70 and 150 square meters. They are located in the center of big cities and have over 7,500 stores in Poland. They have a basic assortment of 1,500 to 1,800 SKUs, the majority of which are alcohol, cigarettes and drinks. They are the most expensive stores but people accept their prices because of the advantages they offer.

You mentioned Eurocash acquired many mom-and-pop private stores; any idea as to what valuation multiples they paid for those stores, in terms of sales or earnings or cash flow?

Normal market price depending on EBITDA values. For a chain of stores that makes $2 million a year, the normal price is 10 to 12 times their annual EBITDA.

Okay, got it.

Everything depends on the condition of the small player. If the condition is wrong or their EBITDA is low then the price is related to the financial result of these stores.

There are many players including big superstores like Carrefour and Lidl and players as small as Żabka; how do they compete with Dino? They have been successful so far but this competition seems to be intense. Is that a big threat for Dino because of how and where they operate?

Dino have no strong competition because they are not located in cities with more than 20,000 inhabitants; they are mainly in very small cities and villages with no competition. A big advantage Dino has over Biedronka or Lidl is the cost of their stores. Dino can build a store for $400,000 whereas for Biedronka it costs $600,000 and for Lidl it's over $1 million. The cost of land in big cities like Poznan, Warsaw, Krakow or Wroclaw is $5 million, compared to less than $100,000 in small cities and villages. If we add up all those costs, Dino have a very low sales expectation and their breakeven point is less than $100,000 per month. Lidl need to make $600,000 and Biedronka need $300,000 per month on average. From a cost structure and sales expectation to make a positive financial result on a per store basis, Dino has the advantage compared to the main players on the market.

Approximately 12 years ago Mr Biernacki sold a 49% share to private equity and invested 200 million Zloty into 1,000 pieces of land. The cost, at the time, was $15,000 to $20,000 per piece of land, and he is building his stores in these places. That means the cost of building and land is extremely low compared to Lidl or Biedronka. It is very difficult to be competitive with Dino because they are unable to build to this cost and the sales expectation is too high for these small villages. Two or three years ago, Biedronka developed a comparable and competitive format to Dino, 450 square meters with a franchising contract for the owner. They are growing in the neighborhood of Dino stores and the first 20 to 30 stores were opened two years ago in the central part of Poland where Dino started. They are located in the region between Wroclaw and Poznan; that is the main area where the first Dino stores were opened, more than 20 years ago. It is too early to know the results of this new format.

Which other aspects do Dino have a competitive advantage? We heard about the fresh meat counter where they process and provide their own meat, how much does that weigh into their competitive advantage?

I told you before that Biedronka have 2,200 SKUs and Dino has 1,000 SKUs more, which makes Dino more attractive. Another advantage is their meat counter. Lidl tested this concept a few years ago and were not successful. They sold it another way by putting special vitrines in big stores but that was a bad solution. Biedronka tested the meat counter for more than 10 years. Many of their newly opened stores were equipped with a meat counter which sold fresh meat, sausages and cheese. Poland customers traditionally buy more fresh products than those which are packaged. On one side, this is an advantage for Dino but a disadvantage is that they only have one supplier, who is Mr Biernacki's brother, and is not a recognizable brand in the Polish market. The quality is acceptable but you cannot find recognizable brands.

You mentioned that you know Tomasz Biernacki or have followed him for a while; we have not been able to talk to him or anybody who knows him personally. Can you give explain who he is, what is his background and why he is so reclusive?

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