Dino Polska, Tesco, and Polish Food Retail | In Practise

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Dino Polska, Tesco, and Polish Food Retail

Former CFO of Tesco Central Europe

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Former CFO of Tesco Central Europe

This executive spent 18 years at Tesco in a range of roles culminating as regional CFO for Central Europe.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.

I am a global investor and I currently manage a very concentrated portfolio. I find Poland to be exceptionally interesting, attractive as a country, as a people, as businesses and as economy, and increasingly I have been spending time learning more about Poland and Polish businesses. That is a little bit about me. I understand you have background in Tesco, which is exceedingly interesting for me. Let me stop there and I would love to hear a bit more about your background before we jump into the actual questions.

I have been working within the retail industry since 1999. I joined Tesco after a short period at a tech company called Comarch, which is a very well-known Polish company. It is one of the most successful Polish IT companies and also the biggest EDI provider in Poland. They also invest heavily in our market and are based in Krakow. I moved from them after four months to Tesco where I worked for 18 years in Asia and Europe, including the UK. I managed to get to know the entire group. I finished with Tesco in 2018 and moved to a pharmaceutical business in Poland called Dr. Max. It is the biggest pharmaceutical chain with 600 pharmacies in Poland, and is the biggest operator of pharmacies in Europe, operating in seven markets. It is owned by a private equity fund called Penta, which is one of the biggest Central European private equity funds of Czech origin.

I worked with them for two years then I was attracted by my current employer, MediaMarktSaturn who are the biggest consumer electronic retailer in Europe, operating in 12 markets. Poland is one of the biggest markets the company operates in and we are in the process of transforming the business to more of an omnichannel ecommerce business. That is nothing new but the company originated from a very traditional brick and mortar model, and is now transforming to a purely omnichannel business, which I am part of. I have been in retail since 1999, first food, then pharmaceutical and now electronics.

What functional role were you involved in when you were at Tesco?

In Tesco, I was the CFO for Central Europe, where I covered four markets: Poland, Czech Republic, Slovakia and Hungary. I was the only CFO for those markets because we clustered the four markets into one. It was not a coordinator job; it was a full CFO job for all four markets.

I am glad I am talking to you. Which city are you currently based in?

My life interests are in Krakow, which is the town I settled down after studies, but I am currently working in Warsaw. I used to commute to Wroclaw and, in Tesco, I used to commute mainly to Prague, but also to Budapest and occasionally Bratislava. I have commuted since 2011 when I moved internationally, from Krakow to many places.

Polish food retail is an attractive market which is why Tesco was there. Can you walk me through how Tesco got involved and their decision to pull out of Poland?

Technically, Tesco entered the market in 1995, but hardly anyone knows that because the first Tesco store was opened in 1999. But four years before, they took over a local chain of small stores in the south of Poland called Savia. This chain was originated from the town where I was born, so that is how I know it. They had 60 small format shops in the south of Poland – not hypermarkets at all – then Tesco started opening shops and the strategy was to open large shops of 12,000 square meters, which they successfully pursued for a decade. On the way, they acquired two companies. In 2002, they bought HIT from a German private owner. It was the first hypermarket chain which entered Poland after the communist break down. It was German owned and, at that time, was the biggest acquisition in the retail market in Europe, worth £500 million. I had the pleasure of managing the acquisition from a finance perspective.

In 2007, they acquired Leader Price which was owned by Casino Group, the French retailer. They left the market and sold their small stores to Tesco and their big stores to Metro Group. Since 2008, Tesco started moving more towards small stores but, at that time, the market was boosted by Jerónimo Martins, which is Biedronka, currently the biggest operator in Poland, who have a large market share in food retail. In a way, Tesco were trying to chase Biedronka with a quite ambitious opening plan of small shops.

Was all this in bigger cities or did it not matter which city they were in?

It did not matter much, but it was mainly smaller cities. It wasn't villages like Dino are doing. Unfortunately, at the same time, Lidl came to the game and they had ambitious plans for Poland. They are still active and the race is between Biedronka and Lidl, although Biedronka is still ahead. Lidl are still trying to take market share from Biedronka, which involved multiple price wars between them, where Tesco were not able to compete.

At the same time, there was a strategy decision made by the Tesco group not to invest into international operations because there was a big threat of Lidl entering the UK market, hence the group focused primarily on the UK. That was the critical point which unfortunately led the company to decide to leave the market because while Biedronka and Lidl were growing, Dino came with a new format of proximity supermarkets. Żabka entered the convenience segment which was and still is growing very quickly. Customers were moving away from the big shops and Tesco were mainly relying on the old format of large hypermarkets which was slowing down. They started losing market share and became unprofitable. This stagnation in growth led to a difficult situation where the company was dragging down the entire group, and therefore, they decided to leave the market because it was simply not adding any value to its portfolio.

Through that evolution of opening up and increasing the number of stores, acquiring HIT and several others, then deciding to close, it looks like there was an exact overlap. As you said, Tesco actually entered in 1999; 1999 is when Dino seems to have opened up as well, so my question is, did you watch Dino from Tesco's viewpoint, grow and compete from a very different angle, not only with Tesco but Biedronka, Lidl, Stokrotka and everybody else?

Yes, at that time we were watching Biedronka who were a benchmark for pricing decisions because they had the best price perception in the market and still do, despite the fact that, technically, Biedronka are not the cheapest. If you look at the pricing analysis of the core product, they come across as cheaper but Biedronka managed to have a very strong price perception over the years which they still maintain. Because of their scale and visibility, Polish consumers believe they are the cheapest operator. For Tesco, Biedronka was a benchmark to match our prices to, to ensure we remained competitive.

Biedronka was everywhere, with over 3,000 shops across the market, and they had a very well-developed distribution network, which is crucial to make small format profitable. Tesco and other large format operators had distribution networks which were not designed to support small format stores. They need many depots across locations and the right fleet because you cannot deliver to small stores with big trucks. Small shops cannot be serviced by bigger warehouses because you have to pick by item, rather than by case or pallet, because it is too much for the store. Those companies and Tesco didn't have this capability and there was a limitation to make small format operations profitable. Before Biedronka was sold to Jerónimo Martins, it was setup by one of the biggest real estate owners in Poland, Mariusz Świtalski. They had quick and easy access to many locations in the country, and scaled up to almost 400 shops.

Dino, at that time, wasn't so much of a threat or a concern as it started relatively small. However, the concept was new and different, because Biedronka and Lidl were discounters, although Lidl is perceived to be a supermarket rather than a discounter, whereas Biedronka is still perceived to be a discounter. Dino was always perceived as a neighborhood or proximity supermarket. An average Dino has 5,000 SKUs whereas Biedronka or Lidl used to have 1,200 SKUs but have increased to 3,000 which is still less than Dino. The core thing in supermarkets like Lidl – and it is a strength of Dino – is fresh food, particularly fresh meat.

The Dino group owns a meat factory so it's vertically integrated which allows it to assure locally produced Polish meat and offer a deli counter as a service to customers. None of the discounters have that so it was a competitive advantage. They also have good quality fruit and vegetables, and in the core groceries, they focus more on brands than private label, which is maximum 4% of the turnover at Dino, whereas the private label at Lidl is 90% of turnover. Biedronka also have double digit participation of private label in their portfolio. Dino would rather offer good quality branded products than focus on their own brands.

How real is the fresh meat advantage and why did Tesco, Biedronka and Lidl not replicate a similar fresh meat program within their stores?

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