Discounting: the possibilities

Discount store chains are playing a more important role in people’s lives. But when the economy revives, will consumers switch back to more expensive shopping?

Mladen Petrov

Ipsos’ 2009 retail survey reveals that as many as 57 pct of Poles have now decided to do their shopping in discount stores. Admittedly, the survey also shows that only one in three Poles is spending less money than before the credit crunch; however, this is still the best result out of the EU nations surveyed. For example, three quarters of consumers in Ireland have started saving. In Poland shopping has become better thought-through, which is reflected by the modest growth in retail sales in 2009. In 2008 this was growing at a two-digit pace every month, and by as much as even 20 pct on the corresponding months of 2007. Last year, although some monthly was growth registered, it was only by a few percent and often close to zero.

It will be busy

Discount stores in Poland have not lost their enthusiasm. Their optimism is evident in their development plans for the country and the whole CEE region. The Biedronka chain, which belongs to Portuguese group Grupo Jerónimo Martins, is planning to eventually have as many as 3,000 outlets in Poland. This is hardly surprising when we consider that the sales of the chain in Poland grew by 33 pct in the first three quarters of last year. Jerónimo Martins has over 1,400 outlets in Poland at the moment and is now turning its attention to some of the country’s bigger villages. Świtalski & Synowie, a company based in Poznań, supports the Portuguese group in their development on the Polish market in terms of finding suitable locations and building new outlets. Tomasz Jurga, a member of the board of Świtalski & Synowie, emphasizes that the rapid growth of the Portuguese group will force it to use services of other contractors soon.

Emperia Holding of Lublin, which also enjoys the interest of franchisees, is another company currently engaged in developing its discount store chain. Last year, Emperia launched 30 outlets outside the franchise systems (one of which was a Delima store, with the rest being the cheaper Stokrotka outlets). “We embrace a number of very different formats, from small shops, through to estate supermarkets, up to delicatessens. Each of them has different strong points. We want to launch more outlets of Lewiatan, Groszek, Milea and Euro-Sklep in cooperation with our franchisees. There will also be more outlets under the Stokrotka and Delima brands,” announces Artur Kawa, chairman of the board of Emperia. At the end of December 2009, Emperia had 161 Stokrotka outlets, 1,146 of Groszek, 2,536 of Lewiatan and 625 of Eurosklep in its portfolio. All of these apart from Stokrotka operate on a franchise basis. Emperia Holding is not revealing its plans for opening new stores this year.

Another point in discount stores’ favour is the positive transformation that has taken place over the last few years. “Chains have introduced good quality own-brands, including in the medium price range and sometimes even premium ones. The metamorphosis of discount stores is also reflected in the improvement in the appearance of their outlets and the introduction of additional facilities, such as for ordering flight tickets,” notes Patrycja Nalepa, senior retail market analyst at PMR Publications.

German expansion

A revival has also been noticeable in Romania and Bulgaria for the last few years – territory where the biggest German discount store chains are locked in combat with each other. Such discount chains as Penny Market and Kaufland were the biggest players on the Bulgarian land market in the difficult year of 2009. “They have been monitoring the market for a long time, but only now have the prices reached a level that they are satisfied with. Discount chains became very active on the land market in the middle of 2009 – after all they were the only investors with cash in their hands. Some of them have not slowed down the pace of their development, in spite of the crisis. They can even currently buy land for construction purposes in Sofia, where it used to be unthinkable. The prices of plots of land have dropped by 20-50 pct compared to 2008,” relates Hristo Asenov, director of the land and industrial space department at MBL/CB Richard Ellis.

A similar situation exists in Poland, where discount chains are also playing the role of land buyers. Last year started with a continuation in the decline in land prices that began in H2 2008. Analysts estimate that in 2009 alone, land prices in Poland slumped by 25 pct on average. However, one should not expect dramatic changes in the prices offered in the next months, following this period of decline. Artur Kawa comments that: “We aim at a relatively even coverage of the country by the supermarkets supported by us. This is why some locations are more interesting for us than others, but the scale of these differences is slight. The economic slowdown has influenced the real estate market in two ways. On the one hand, many developers have put their projects on hold and the number of locations offered by them has declined compared to previous years. On the other hand, prices have dropped a little. Unfortunately, in the case of plots in particularly good locations – and these are the ones that interest us most – the decline in prices was not so significant because the interest in them has not diminished.”

Discount stores are also visible on the warehouse market. Penny Market finished the construction of its distribution centre in Stolnik near Sofia in 2009. Lidl is also building its operational centre in Elin Pelin, several dozen kilometres from the centre of Sofia. Retail market analysts agree that this will be the year of the discount store in Bulgaria. All the players are carrying out the same strategy: they begin their penetration of the market in smaller towns, and as time goes by enter the bigger ones. Kaufland’s Bulgarian network already consists of 27 outlets, with three others to be opened shortly.

The price of growth

Lidl is to open its first outlet in Bulgaria in 2010, while Plus and Penny Market are announcing further expansion. However, a number of commentators are now saying that discount chains are too optimistic about the Bulgarian market. Penny market, which belongs to the German Rewe Group (the owner of the Billa chain), plans to invest as much as EUR 250 mln on its development in Bulgaria. It is planning to have 50 outlets in the country by the end of the year. Vasil Fechko, the director of Penny Market in Bulgaria, believes that even though the prices of plots has become more attractive now, the bottom has yet to be reached. “There are practically no transactions, so sellers are starting to realize that they have to lower their demands. We can already see that they are opening up to negotiations, which does not change the fact that the price of land remains relatively high in Bulgaria,” claims Vasil Fechko, who goes on to add that Penny Market has already bought most of the plots needed for its outlets. “When building our stores, we can also benefit from the current lower prices demanded by construction companies. And we are interested in every town with over 15,000 inhabitants.”

Puls (a chain of 210 outlets, which was taken over by Jerónimo Martins at the end of 2007) is looking to invest EUR 300 mln in Bulgaria. The opening of 130 outlets of the German chain is planned in the country over the next few years. Puls is the owner of 70 plots of land, including five in Sofia. The company’s plans for 2009 include the opening of 25 stores with areas of 1,000 to 1,200 sqm. In addition, it will also be building a distribution centre near Sofia at a cost of EUR 30 mln.

The same players are also battling it out on the Romanian market. The European Bank for Reconstruction and Development signed a credit agreement for EUR 150 mln with Schwartz Group, the owner of Kaufland, in the middle of last year. The funds will be allocated for the opening of 20 outlets in the less developed towns of the country. In Bulgaria, 13 stores are also to be opened using these funds. Discount stores were the kind of tenants that Red Development had in mind when planning its Cadran shopping centres in Romanian towns with 25,000-75,000 inhabitants. A typical Cadran centre will have an area of between 5,000 sqm and 10,000 sqm, with its key tenants being discount chains. The first centre is to be built in Huşi, and the anchor tenant in the complex is Penny Market.

New Mini Park shopping galleries developed by Poznań-based Świtalski & Synowie are built in the same manner. The company, which focuses on projects in county towns, is currently planning the development of 100,000 sqm of retail space. Last year, it announced plans to build several dozen mini-malls. The first Mini Park galleries will be built in Kalisz (2,550 sqm, opening in March), Płock, Wolsztyn and Goleniowo. Eventually, a total of around 30 galleries are to be built, featuring Biedronka as the main tenant. “If a location is not suitable for the chain, we will negotiate with other discount stores,” explains Tomasz Jurga. “We are planning to invest app. PLN 200 mln in retail space,” he reveals. Upon their completion, Mini Parks will be sold separately to individual and institutional investors. The main tenants of the newly built facilities include chains such as Biedronka and Pepco.

Clothing at a good price

Pepco, a country-wide Polish discount store chain with clothing and industrial goods owned by Pepkor, a South African investment company, has opened its 175th store in Poland in February and is now hungry for more. The chain is not easing up on its expansion, and is planning to open 35-45 outlets in Poland each year. Eventually it intends to have a network of 400 stores, but so far its business activity in Central Europe has been restricted to Poland.

Pepcor is the owner of all its outlets, just like Redan of Łódź, whose portfolio includes, among others, clothing discount store Textilmarket. Piotr Kulawiński, the chairman of Redan, is satisfied with the continuing profitability of the chain and the lack of any damaging impact from the credit crunch. “The profitability of this business is constantly growing and we are gaining more and more experience every year. 
The scale which we have managed to reach is very important in case of discount stores,” remarks Piotr Kulawiński, announcing further expansion “provided suitable locations exist”. 
The chain currently comprises 162 outlets in towns of up to 50,000 inhabitants, but this is supposed to be the year of “strong development”. “In 2010 we want to increase the number of our locations by 53 outlets. And in the following year there will be another 72 stores,” claims Mr Kulawiński.

The opening of one outlet costs app. PLN 80,000-100,000. Taking into consideration such costs, the company will not suffer if it has to close one in ten outlets that have turned out not to be profitable. Due to the low costs, the company does not want to develop as a franchise format because it is able to finance its own development. So far it is sticking to small towns. “We have looked at the bigger cities and the specificity of their markets. Smaller towns have been much safer for us,” explains the chairman of Redan.

TK Maxx, a chain of discount stores that belongs to the American corporation The TJX Companies, has a different strategy. It focuses on top-shelf designer clothes but sold at lower prices. It is popular in Great Britain and Ireland and is now taking its first steps in Poland in a few shopping centres. The company eventually wants to have as many as 30 outlets in Polish shopping centres. “It has a competitive offer in the West, but TK Maxx is an exclusive discount store in Poland, whose offer is not really directed at average clients,” believes Piotr Kulawiński.

The German-owned Takko Fashion also regards Poland and the entire region with a positive eye. Two hundred and thirty of its 1,400 outlets in Europe are located in CEE countries. Takko Fashion started its expansion in the region in 2003. It has 80 outlets in the Czech Republic, which is the biggest market for the company; there are 50 outlets in Hungary and around 30 in Slovakia and Romania. It also has 25 outlets in Poland, where it has been present since 2008, but it has an appetite for much more.

 “Depending on the market situation, we would eventually like to have a minimum of 200 outlets in Poland, located mainly on the outskirts of towns and cities in retail parks and shopping centres. Consumers in this part of Europe are price sensitive, but at the same time they have high requirements. We can see a lot of potential in small and medium towns,” says Jutta Melchers from Takko Holding.

But when will this potential come to an end and the consumer switch to more expensive shopping? “Thanks to the ability to adjust the offer to the changing purchasing power of consumers, a discount format can remain popular even when the economic situation improves. The consumers who become convinced that they can get a good product at a good price in discount stores, are still likely to visit them even when they do not have to save money any longer,” believes Patrycja Nalepa of PMR Publications. ν