Albert Heijn (AH),
the internationally-oriented, but very Dutch supermarket chain has put its
“secret weapon“ in The Netherlands in action again:
The clumsy,
imaginary branch manager from the AH commercials – played by Holland’s
unfunniest comedian Harry Piekema, who became famous through a multi-year
commercial series and has got an exclusive, no-public-performance-allowed
contract with the supermarket chain – has announced in a new commercial that ‘he’
would lower the prices of more than 1000 A-label products.
Branch manager
Piekema’s noble aspiration was supposedly ‘to help the Dutch customer through
these times of economic hardship’. And of course this was also the reason for
Albert Heijn to start this new price war! Really!
Everybody who
generally believes in the kindness of large store chains in the retail industry
and especially in the nobility of Albert Heijn should now stop reading! Inquiring
minds, however, will wonder why Albert Heijn – after ten years – will use the
nuclear option again in The Netherlands. Because that is what a price war is
all about!
By starting a price
war, you hurt:
- · Your own company, by throwing your necessary margin and profits down the drain: not only through your own price-action, but also through the price-actions of your competitors, who cannot stay behind in such a war;
- Your suppliers, as they are ‘ kindly asked’ (i.e. aggressively forced) to foot a (large) share of the bill of your price war and that of your competitors;
- Large and strong suppliers, who deliver famous A-labels, either keep enough margin to still cover their expenses or they have sufficient reserves to stand a price-war for a certain period. Most of them are (reluctantly) cooperative when such a price war is started by one of the biggest supermarket chains, as both parties know very well that they really need each other;
- However, small agricultural suppliers and (small) suppliers of tiny A- and B-labels and generic brands have often very little margin on their products and they are very vulnerable for price wars. For them a price-war is nothing less than a catastrophy;
- Perhaps even your own customers. As your action will trigger a counter-action from other super-markets, this adds to the confusion of the clients: they don’t know where to go and what to pay for their favorite products. As a response, your most frugal customers start to dig in flyers and leaflets, just looking for the best price. Especially in times of austerity, customers do their best to save a penny. Consequently, there is a considerable chance that you might lose loyal customers, when they get acquainted with your competition during a price war.
The only rational
reason to start a price war is: when you are the strongest party in a country
or territory and want to really hurt or even annihilate growing and
theoretically dangerous competitors. I have a sneaky suspicion that this might indeed
be the case in this price war.
With 35% market
share, Albert Heijn is by far the largest supermarket chain in The Netherlands.
It has shops in virtually every town and village and in almost every mid-range neigbourhood
of the large Dutch cities. In some neighbourhoods and villages Albert Heijn even
has a virtual monopoly, as their competitors don’t have shops there at all.
During the last 15
years, the retail landscape for supermarkets changed dramatically. Large, Dutch
supermarket chains like Laurus (labels were a.o. Super De Boer, Edah and Konmar)
and C1000, with both hundreds of shops, nearly defaulted and had to be liquidated.
The near default of
C1000 and Laurus happened as a consequence of their much too aggressive expansion
strategy, their unclear corporate branding strategy and their indefinite ‘look
and feel’, which didn’t stand out for anyone, for any reason whatsoever: these
shops were neither cheap, nor classy, extremely large or exclusive.
Due to the excess
expenses of these chains and the disappointing earnings, remaining way too low
for a number of years, the money ran out like water in the desert. Eventually the
liquidation took place through ‘fire-sales’ of the shops and transfers of their
franchiseholders to other labels. Albert Heijn and another large and growing
supermarket label – Jumbo – took over the stores and that was it. In spite of
the fact that other smaller chains like Plus, Lidl, Aldi, Jumbo and Dirk van
den Broek showed substantial growth, the absolute number of dangerous
competitors for Albert Heijn diminished.
At this moment, there
are only two supermarket chains of which Albert Heijn is particularly
frightened in these times of austerity: Jumbo and the Lidl group.
Jumbo is a strong competitor,
because of its sheer size: it has a market share of 22%, making it the largest
competitor of Albert Heijn.
However, the most
dangerous competitor for Albert Heijn could be Lidl, in spite of its relatively
small market share of 9%. This group of internationally operating, German
discount markets-with-a-twist is akin to the (also German) Aldi group, but is
even more successful.
Lidl’s shops are deceptively
simple and consistent, but without having the uncosy and sterile charisma of
Aldi. Further, the chain almost only sells private label articles at
near-suicide prices, but these articles are nevertheless of A-label quality and
even look like the original A-labels. On top of that, vegetables and meat of
the highest quality are sold at very competitive prices.
The biggest trump of
the supermarket chain is, however, that Lidl offers clothing, shoes, sportswear,
electrical and mechanical tools and even televisions and computers, in limited
supplies at absolute bottom prices. These specialty offers are one of the reasons
for the massive and growing popularity of Lidl.
When the price war
was announced by Albert Heijn, last weekend, the ‘word on the street’ was that
this was to hurt Lidl. I considered this total nonsense from the beginning.
If you want to
battle Lidl by lowering the prices of 1000 A-label products, you really don’t
understand the Lidl customers. Frankly, these customers don’t give a rat’s *ss
about A-labels; that is the main reason why they shop at the Lidl.
Lidl customers want
to do their shopping with (in average) 15% - 20% discount on their weekly bills,
when compared to market leader Albert Heijn. This discount includes the high(er)
quality meat and vegetables of Lidl.
They want to buy Lidl’s
private lable diapers, which are always sold at the lowest price in the market,
except for the scarce moments when the A-labels have REALLY good offers on sale.
The latter happens only once in a while.
And Lidl customers don’t
want to pay more than €0,52 for two liter fake-cola, which tastes just as good
as real Coke (really(!); I am not sponsored by Lidl for this conclusion), but
sells at a fraction of the price for ‘the real thing’. They take for granted
that their name is not printed on the bottle.
Especially in these
times of forced austerity, many young Dutch families with young (!) children,
who are not spoilt by commercials yet, save their household money by buying
cheap groceries at the Lidl. The idea that Albert Heijn could turn this around
with only 1000 lower priced A-label products is just ridiculous.
Tonight, I was informed
of what might be the real reason for Albert Heijn’s price war, through the blog
of Gerard Rutte, aka the supermarket specialist (you
could read more about Gerard through this
earlier article of mine).
On his very good and
interesting blogsite, Gerard had printed an anonymous letter
which he received from an obvious insider in the supermarket industry. I
will print here the edited, pertinent snips of this absolute must-read article,
but I regret I could not translate and print it integrally:
CFO Ton van Veen of Jumbo stated at the presentation
of the annual data for 2012 that the financial basis of Jumbo is sturdy. In my
opinion however, the headline should have been “Jumbo at the edge of defaulting”.
In 2009, Jumbo took over Super De Boer for €550
million, but the rebranding operation faltered very quickly. Warnings about
disappointing revenues emerged. When the rebranding operation was finally at
full speed, in November 2011, there was the surprising news that Jumbo took
over the C1000 formula for €900 million. The whole project had been financed by
ING, ABN Amro and Rabobank. That was the moment when hell really broke loose.
Messages from the market soared about Jumbo’s heavily disappointing revenues and
gross margin.
Jumbo’s suppliers have been strangled. The payment
term for invoices has been extended from 30 to 60 days. Indirectly, suppliers
pay for the rebranding operation. However, this extra financial leeway is not
mentioned in Van Veen’s presentation. Where did the money go?! Jumbo’s debt at
the end of 2011 was €1.2 billion. According to the annual data of 2012 this has
been brought back to €600 million.
However, according to my calculations, the debt is
still €1.2 billion. And against what collateral?! This collateral must be the book
value of all stores and distribution centers, as these have been used as pledge
for the banking syndicate.
When I put the presumed value of this collateral against
the presumed real debt, I end with a negative equity of €360 million. To make
things worse: at the same time, Jumbo’s strategic focus seems to be aimed at
short-term financial gains only.
Currently, Jumbo might perhaps stand its ground, but
it will definitely lose the war in the coming years. On top of that, as a
consequence of AH’s current price war actions, Jumbo is forced to adjust its
prices to the market leader, which will further deteriorate the gros margin.
The consumers are yet supporting Jumbo, but when will the suppliers and banks
hit the emergency brake?!
I cannot check the
assumptions that this anonymous insider made, so I print those ‘as is’. I also
didn’t ask Jumbo for its comments at these allegations, as I’m not a
professional newspaper. Therefore I can’t judge the amount of truth in it.
Nevertheless, to me
these allegations would explain why Albert Heijn is launching its price war at
this very moment. I guess that the supermarket chain smells blood and aims at annihilating or seriously hurting Jumbo. When the financial situation of Jumbo is indeed so awkward as the
insider states, than this attempt by AH might be successful eventually.
Still, it is my
conclusion that this action might backfire heavily at Albert Heijn, which –
according to Gerard Rutte – puts too much trust in its online strategy and seems
to suffer from a lackluster strategy for the brick-and-mortar stores.
Where in the past Albert
Heijn could afford itself to be the most expensive supermarket chain, because it
was undoubtedly the best of the breed, nowadays the former seems to be more certain than
the latter.
Today I saw that
every serious supermarket chain – including Jumbo – has been lowering its
prices.
While this action
is definitely bad for Jumbo and for the suppliers of AH and the other chains,
it could also go awry for AH itself: AH’s loyal, but increasingly frugal
customers could decide to stop being loyal. They might start to visit other
supermarkets, like the Lidl and might stay there as customers, never to return to
Albert Heijn anymore.
And there is more:
if AH could indeed drag Jumbo down and score a few extra stores in the process,
it would attract the attention of the NMA (the Dutch competition authority) for
having a near-monopoly position. In this case AH could be forced to sell a few
dozen stores or more.
In this scenario,
Albert Heijn would indeed pay the bill for their action, eventually. An unrealistic
scenario?! Don’t put your money on it!
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