Consolidation, rise of discounters shaping outlook for grocery market in SEE

By Milan Cakic, contributing analyst at Euromonitor International

The lucrative industry of retailing services in Southeast Europe (SEE) is undergoing an important transition. The countries are lagging behind more developed West European markets in terms of general economic power as well as, more specifically, development of retailing industry. However, since there are some important differences between the SEE countries reviewed here – Slovenia, Croatia, Bosnia and Herzegovina, Serbia, Macedonia, Romania and Bulgaria – it can be argued that they individually represent various stages in the development of the retailing landscape. Namely, even though there is no doubt that all of these markets are following the path of evolution set by more developed markets, it is also clear that not all SEE countries are currently in the same phase of the more or less linear development course they are on.

SEE nations have witnessed a drastic change in their grocery retailing industry since the beginning of the 1990s. Today there is a strong consensus among most stakeholders as well as observers and researchers engaged in this entrepreneurial domain that the SEE countries are not likely to divert from the road trodden by West European countries. All in all, it is obvious that the markets in question are seeing a modernisation of their grocery retailing landscape.

Driving forces behind changes in grocery retailing in SEE

There are three general and two rather specific trends which are decisively influencing the grocery retailing landscape in SEE countries. The most important general trends are: market consolidation, increasing share in overall sales of private label brands in virtually all fast-moving consumer goods (FMCG) categories and rising popularity of discounters as the grocer of choice for more and more consumers. A further two trends which should Consolidation, rise of discounters shaping outlook for grocery market in SEE By Milan Cakic, contributing analyst at Euromonitor International not be overlooked are the growing popularity of convenience stores and the fast development of internet retailing in these markets.

According to Euromonitor International data, the combined share of the top five grocers did not exceed 55% in any of the SEE countries except Slovenia in 2013. Thus the leading five grocery retailers grabbed only 22% of the market in Macedonia in 2013, 32% in Bulgaria, 36% in Romania, 37% in Bosnia and Herzegovina, 40% in Serbia, and 55% in Croatia, with Slovenia as the only country with substantially higher share, of 80%. However, in 2008 these percentages were much lower still, more than ten percentage points lower in every single country, again with the exception of Slovenia where the top five grocery retailers actually lost three percentage points in the 2008-2013 period. For example, the top five grocers in Bulgaria accounted for only 23% of the market in 2008 and as low as 16% in Macedonia.

The above-cited figures unambiguously show that market consolidation is a very important and certainly very strong trend on the grocery retailing sector in SEE with massive potential for transforming the markets in the region. This process is reshaping the grocery retailing landscape in the region and the strongest companies are acquiring smaller ones, hence growing in size as well as in strength. For example, in Serbia over the course of the last five years only, Delhaize Group took over Delta Maxi, second-ranked grocer Mercator-S – the Serbian arm of Slovenia’s Mercator – purchased peer Familija and Croatia’s Agrokor Group took over the Tus supermarkets.

Certainly the most important development when it comes to market consolidation, which is influencing most of the SEE countries, is the acquisition of Mercator by Agrokor Group. The deal, which was in the centre of attention for quite a while, finally materialised in 2014. It will have more than visible effects on the markets in the western parts of the SEE region, primarily in terms of market shares but also in terms of, for example, the visual marketing and branding of the leading retailers and the shop-ping experience in general. This will face other large retailers in these countries with a super-strong competitor, as Mercator and Agrokor are already holding some of the leading five positions in these markets. It can be concluded that market consolidation is gaining momentum in the region thanks to the mere fact that most of the SEE markets simply have a notably underdeveloped retailing industry with a lot of room for big players to maneuver and take over smaller chains which are in great danger of losing ground and going bankrupt.

The next big trend in grocery retailing in SEE markets is the increasing share of private label brands in most FMCG categories. Some five or ten years ago – depending on the country, when private labels first started to appear, people were somewhat skeptical about product quality. Even though these products were sometimes offered at considerably lower prices than branded products, many consumers were reluctant to abandon branded products and to even consider trying private labels. However, this has changed with time due to two decisive factors. Firstly, consumers have become increasingly aware that private label brands are in many cases actually produced by well-known and renowned, usually domestic, companies. On the other hand, retailers gradually started to offer more and more private label products in virtually all FMCG categories and these two factors naturally led to the increase of their shares. However, even though the share in over-all grocery sales of private label products is growing in all SEE countries, it is also quite obvious that these countries continue to exhibit considerable differences. Euromonitor International’s research has shown that Slovenia is the absolute leader in terms of private labels’ importance in this region, with as much as 31% share of private label products within paper tissues and hygiene industry and 22% share in soft drinks. At the other extreme, in Bosnia and Herzegovina the share of private labels in overall sales of tissue and hygiene products is only 3.0%, while in consumer health, hot drinks and soft drinks industries private labels are either non-existent or negligible in this country. Of all SEE countries besides Slovenia, only Croatia has significant shares of private label products. For example, the share of private label products in Croatia is as high as 20% in paper tissues and hygiene and 11% in hot drinks. As mentioned, the market share of private label products is growing across the SEE countries and in virtually all FMCG categories. For example, the share of private labels in Serbia within packaged food industry has increased from less than 1.0% in 2008 to 3.0% in 2013. Over the same period, the share of private labels jumped from close to zero to 2.0% on the hot drinks market in Bulgaria, from 2.0% to 9.0% on the soft drinks market in Romania and from 6.0% to 10% on the beauty and personal care market in Slovenia.

A third general trend demonstrating that SEE grocery retailing is starting to resemble more and more the grocery retailing landscape in West European is the increasing number and growing market share of discounters. This trend is, of course, closely connected to the aforementioned one as discounters offer relatively more private label products than any other retailing channel type. In Bosnia and Herzegovina there are no discounters and in Serbia and Bulgaria the share of this channel in overall grocery retailing went up from zero in 2008 to 1.0% and 8.0% in 2013, respectively.

In Croatia discounters have gained four percentage points in the same period to reach 6.0%, and in Macedonia the channel increased its share by three percentage points to 6.0% in 2013. Slovenia is the most developed country in this sense as well with discounters there having increased their share in grocery retailing from 9.0% in 2008 to 17% in 2013.

When it comes to the expansion of discounters, especially interesting is the announced entry of Lidl on the Serbian market. Namely, Lidl’s owner, Schwarz Beteiligungs GmbH, registered a company in Serbia in 2010 but is yet to launch operations. According to the latest official press release by the company issued in the beginning of 2014, it has already purchased land in several Serbian cities where it is planning to build supermarkets and is planning to open some fifteen stores simultaneously. This development, which will probably take place during 2015, is expected to have a rather notable impact on the Serbian retailing market. Furthermore, it will prove that the discounting channel is indeed growing in popularity in the SEE countries.

There are a further two interesting trends in grocery retailing in SEE which are somewhat specific to the region. The first one is the increasing popularity of convenience stores. This channel has increased its share within grocery retailing from 5.0% in 2008 to 10% in 2013 in Bosnia in Herzegovina, and from 6.0% to 8.0% in Serbia. The trend is particularly visible in these two countries due to the still very high share of independent small grocers there. As traditional retailers lose market share, convenience stores are winning over consumers who are often reluctant to commute to the city outskirts where most large modern retail centers are located and choose convenience stores over independent small grocers because of their superiority in terms of product range and pricing.

Internet retailing in SEE countries is growing in lockstep with the increase in the overall number of internet users in the region. Thus the share of internet retailing within overall retailing has increased from 1.3% in 2008 to 2.3% in 2013 in Slovenia, from 1.2% to 1.8% in Romania, from 0.4% to 0.7% in Croatia and from 0.2% to 0.6% in Serbia, all in the same period. Most of this growth certainly comes from the on-line purchase of non-grocery products but in the last several years, a strong trend of grocers increasing their online offerings is also visible. The leading grocery retailers are quick to pick up on the latest trend of consumers starting to purchase groceries via the internet and a point can be made that SEE countries are not as far behind West European countries in this sense as is the case when it comes to other trends. In other words, internet retailing of grocery products in SEE will develop more or less simultaneously with the more developed countries.

Euromonitor International’s data indicate that all of the trends outlined above are expected to continue influencing and transforming the grocery retailing landscape in SEE countries. The shares of the top five retailers and private label brands are certainly expected to keep rising over the next five years in almost all countries in the region. Furthermore, the importance of discounters is also forecast to grow. For instance, this channel is expected to account for 12% of grocery sales in Bulgaria by 2018, which is a four percentage points increase compared to 2013, while in the same period discounters will gain three percentage points in both Croatia and Slovenia to reach 9.0% and 20%, respectively.

The following five years are also bound to be very interesting in terms of large international companies entering new markets, but some significant withdrawals might also occur. Most SEE markets are fairly underdeveloped and there is a lot of room for new companies to enter several markets. It was already mentioned that Schwarz Beteiligungs GmbH is expected to enter Serbia but other big chains such as Billa, Carrefour, Aldi and maybe even Tesco may turn their attention to these countries as well. However, we witnessed a major withdrawal as well. Namely, Delhaize Group SA sold all of its outlets in Bosnia and Herzegovina and Bulgaria in the beginning of 2014, a year after the company exited Albania and Montenegro. For now, the company is adamant it has no plans to withdraw from Serbia where it currently holds the leading position. However, this should be taken with a grain of salt, especially considering that after the acquisition of Mercator, Agrokor will take over the top position in Serbia.

As has already been suggested, the SEE countries represent different stages in the modernisation of grocery retailing. Slovenia is obviously in the final stages of this process and its grocery retailing landscape is closer to Central European or even West European markets than it is to SEE countries. Croatia is first in line after Slovenia, with many indicators which bring this country closer and closer to the more developed markets. On the other hand, Bosnia and Herzegovina, Macedonia and Serbia have a long way to go before they catch up. Finally, Romania and Bulgaria are somewhere in the middle. There is no doubt that the countries which are currently in the early stages of the modernization process will accelerate their development over the forthcoming years, and this will slowly diminish the existing differences between the grocery retailing markets in SEE.