Swiss retail giants Migros and Coop are gearing up for the expected arrival of Germany’s two major discount chains, Aldi and Lidl.This content was published on October 21, 2004 - 12:09
But in an interview with swissinfo, retail sector expert James Bacos says the Swiss market leaders are much better positioned to fight their patch than their German colleagues.
Bacos, director of Mercer Management Consulting’s Munich branch, is the co-author of a recent study into Germany’s “discount store wars”, which have seen Aldi and Lidl capture about 40 per cent market share.
Aldi has announced plans for stores and distribution depots in both French- and German-speaking parts of Switzerland, and arch rival Lidl is expected to follow shortly.
Bacos says the fate of Switzerland’s established players will depend largely on whether they learn from the mistakes of their German colleagues.
swissinfo: What was the main finding of your study into the German market?
James Bacos: The main conclusion was simple – the discounters have already won. They have created a world divided into discount stores, which carry a relatively small range of products at very low prices, and hypermarkets, which carry a full range at a substantially higher price. The latter survive because they act as a one-stop shop.
The problem is that people in Germany have learned to split their baskets – they buy cheap basic goods at discounters, then go elsewhere for other products. Now, with some 40 per cent of the market, the discounters are looking to expand into other markets, including Switzerland.
swissinfo: Where did the German retailers go wrong?
J.B.: One major error was to think they could keep overall high shelf prices by having heavy promotional spending on specific items. But this costs a lot of money, and they also need to persuade people to buy all the things that are not on promotion. That is not happening, because the overall price differentials are simply too high.
In Britain, the established players did not underestimate the power of the discounters. They lowered prices selectively, but also offered a complete range of products, including their own brands, and with a clear hierarchy of products and prices.
The result is that the British discounters have been marginalised.
swissinfo: Will the discounters succeed in Switzerland, where market leaders Migros and Coop are much more dominant?
J.B.: Switzerland is different to Germany in several ways – in fact, it looks very like Britain did five or six years ago.
What is interesting is that they both have high land prices, which helps to keep the discounters out. Both also have relative labour market flexibility, whereas discounters benefit most when working times and labour costs are strictly regulated.
Apart from such barriers to entry, the Swiss also have the big advantage of timing – as I said, in Germany, the discounters have already won.
swissinfo: How much will the overall price differential between Switzerland and Germany have to change for Swiss retailers to succeed in the long term?
J.B.: Fribourg University conducted a basket comparison of 177 articles at the end of 2003. The results showed that the German basket was almost half the price of the Swiss basket.
This differential was not just on “entry level” and “no-name” products, but also on well-known branded products. This differential will probably go down ultimately to about 20 per cent.
For the time being, suffice it to say that the Swiss are paying way too much and they should be happy about recent developments.
swissinfo: So what are the strategic options for the Swiss firms?
J.B.: If they go the German way, the discounters will quickly teach the Swiss that it is possible to buy very good quality at very low prices.
In my opinion, the main Swiss players have to go the British way. Migros and Coop at least still have the chance to beat the discounters, whereas in Germany the only valid strategy now is to try to be number two behind them.
swissinfo: Are they taking your advice?
J.B.: To date, they have taken very different approaches. Migros reacted early, introducing its M-Budget line several years ago.
Coop is positioning itself with very aggressive promotional campaigns. The problem with Coop is that it still has huge overall price differentials and it is not clear that this is compensated for by superior quality or service.
A comparison of a typical goods basket shows that you would pay SFr112 ($92) at Denner (the low-cost leader), SFr117 at Migros and SFr137 at Coop. And half the Coop products are on promotion – otherwise the difference would be even greater. Where would you shop?
swissinfo-interview: Chris Lewis
Migros and Coop have a combined share of more than 70% of the Swiss food market.
But Bacos says Swiss supermarkets face growing competition from “day-trip shoppers”, who buy food and other items in neighbouring countries.
Estimated spending in German, French and Italian stores last year totalled SFr1.4 billion ($1.14 billion).
Swiss supermarkets are getting increasingly nervous about the prospect of a price war with German discount giants Aldi and Lidl.
Swiss supermarket prices are currently roughly double those in Germany.
But retail expert James Bacos says the main Swiss retailers are still well placed to compete – provided they react now.
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