Real politik

The prospect of the acquisition of German hypermarket chain Real rekindled the imaginations of market observers long before the signing of the preliminary agreement. This is not surprising as the investment came to more than EUR 1 bln – quite a substantial amount even for Western Europe. In November 2012, following about half a year of market gossip, the French behemoth decided to swallow the struggling German colossus (Real’s cumulative net loss exceeded EUR 300 mln at the end of 2013). The French put EUR 1.1 bln on the table. Vianney Mulliez, the president of the administrative board of the Auchan group, said at the time: “Through the acquisition of 91 stores and 13 high quality shopping centres, Auchan is evening out its presence in Central and Eastern Europe with other priority development areas, such as Western Europe and Asia.”

Waiting for offices

However, this was only the beginning of the take-over of Real. The most urgent issue involved obtaining the consent of the anti-monopoly authorities for the acquisition of 91 hypermarkets in Poland, Russia, Romania and Ukraine as well as 13 shopping centres in Russia and Romania. This was accomplished with some efficiency in Russia and Ukraine in Q1 2013. Metro Group was managing only two hypermarkets in Ukraine: in Kyiv and Odessa. And so the opening of the first store with the new logo took place in Kyiv as early as April 19th, 2013. There were also no majorproblems in Russia. Out of all the 16 hypermarkets the French chain bought it was only obliged to sell one – in Kotelniki, 20 km south east of Moscow.

Polish ways

The approvals in Poland and Romanian took more time. The first (out of 20) Auchan hypermarkets that used to operate under the Real logo, was only able to start operating in Bucharest on November 17th, 2013. The Polish Office of Competition and Consumer Protection (UOKiK) took the longest time to reach its decision, ten months after the submission of an application – and it came with a number of caveats. Auchan Polska had to sell its rights to eight Real hypermarkets and this has to take place within a maximum of 18 months from the finalising of the transaction. Whether it liked them or not, Auchan agreed to these terms and concluded its contract with Metro Group at the beginning of November. Auchan has now taken over a total 57 hypermarkets in Poland (with four new Reals having been opened and one shut down since the initial agreement was signed at the end of November 2012).

Auchan takes the “professional” approach – to rent reduction

In spring 2014, when the integration of the stores in Russia (16), Ukraine (2) and Romania (20) was already complete, the same process was only just starting in Poland. On June 26th Auchan finished the rebranding of the first Real stores it had bought in Poland, including one in the Karolinkashopping centre in Opole. So far the French grouphas managed to reach agreements for another twelve locations with three owners: BlackRock, Mayland and Apollo-Rida. “Negotiations withAuchan for the rebranding in Riviera were conducted in a smooth and professional manner. I think that the speed of them was significantly due to Mayland’s experience as a developer and facility manager on the one hand, as well as its practical knowledge in retail which goes back as far as when it was part of Géant group,” saysMaciej Kiełbicki, the managing director of Mayland Real Estate. “As regards the final arrangements with our partner, I do not want to speak about this. Negotiations over opening an Auchan in Fort Wola are in progress, conditioned by changes to the future character of the centre,” adds Maciej Kiełbicki.Negotiations with the other shopping centre owners are also taking place. “We are renegotiating the rents for all the integrated stores, and this is a process that takes time,” says Marek Szeib, the president of Auchan Polska. “Our aim is to create a common history with the shopping centre owners, which will increase the footfall in the centres over the long term. The integration process is spread out over two years. We are planning to mount the Auchan logo on twelve Real stores by the end of 2014 and the remainder in 2015,”declares Auchan Polska’s president. The Auchan chain is now very focused on renegotiating the rents previously agreed to by Real – and these are not low. The French group has not revealed the rent levels it currently has to pay for the stores. The only thing we know is that its total rent obligations related to the acquisition of the 57 Real stores in Poland have been estimated at EUR 636 mln – at least this is what it says in the group’s semi-annual financial report for H1 2014. The group does not want to disclose how much it pays in individual centres. According to our findings, these rents are much higher than the current market rates. The rent per sqm for a Real hypermarket per month in one of the largest cities in Poland averages around EUR 14 (with the rent level often tied to the turnover). Current market rates, however, are about EUR 6–7 per sqm per month. It is not surprising, therefore, that Auchan is focusing on renegotiations – and its appetite for price reductions seems to be quite substantial. “We have received a starting proposal of app. EUR 4 per sqm,” says a representative of a shopping centre in western Poland, which wishes to remain anonymous. “We certainly cannot accept it,” he adds. He is quite confident, however, that the matter will be resolved – particularly considering the fact that Real is bound to that centre by a long term lease.

Meeting half-way

Nevertheless, both parties are aware that sticking to their guns might do more harm than good. “In negotiations we focus on long term cooperation with mall owners, working on contracts that will be beneficial for both parties. An Auchan hypermarket in a shopping centre generates higher footfall. If this increase in the number of customers is obvious in the hypermarket, then it will also be visible in the mall. This in turn translates into a win-win situation,” explains Marek Szeib. He also insists that he does not expect to fail to reach an agreement with any of the owners.Market analysts concur with this line of thought. “A hypermarket or supermarket is always an anchor tenant that ensures regular footfall. It is not the case that the entire mall itself only generates the footfall and the hypermarket simply utilises that. It is the main tenant in the majority of cases, but it should also harmonise well with the mall,” believes Marek Noetzel, a partner and director of the retail department at Cushman & Wakefield in Poland. “These are certainly not simple negotiations. We have previously been involved in the shutting down of the Marrionaud chain in Poland, when we negotiated the termination of contracts by mutual agreement before their expiry dates. And although this concerned smaller areas, the negotiations were far from straightforward. I am guessing that the scale of the problems increases together with the size of the outlet, because the larger they are, the less fluid the market,” adds the C&W expert.

Docking the tail

Auchan also has to face another challenge. It needs to dispose of eight hypermarkets that it would very much like to keep, but the UOKiK has decided that this would restrict the competition on local markets. Finding interested parties might not be easy because the authority has insisted on a number of conditions for their sale. The hypermarkets must be sold to an investor that does not belong to the Auchan capital group or is co-controlled by any entity from the group. And on top of that, the new investor must provide surety and a guarantee that the store will be operated along the lines of its current activities, i.e. the sale of everyday consumption goods in a hypermarket of the same area. The eventual investor must be approved by the UOKiK. Auchan does not want to discuss the state of the sale process. However, the speculation on the market is that the hypermarkets could be acquired by competitors already present in Poland. “Of course, one should not rule out the possibility of somebody new buying the stores, but I personally find it difficult to imagine such a scenario. The market is too competitive. The stores that Auchan needs to sell have existed on their local markets for many years and the revenues they generate can be evaluated. I think that an entity will emerge that is interested in buying them, but it is more likely to be someone who already operates on the Polish market,” believes Marek Noetzel. ν