Wednesday 13 December 2017

Own brands give boost to multiple's bottom line

Grocery retailer MD expects sales at SuperValu and Centra this year to be relatively flat, but says it's a complaint many companies would relish these days. By John Mulligan

Martin Kelleher: 'Superquinn is a business that we think we can improve from a customer perspective, and we have to look at how to get the best
from both organisations so as to strengthen it'
Martin Kelleher: 'Superquinn is a business that we think we can improve from a customer perspective, and we have to look at how to get the best from both organisations so as to strengthen it'

It's Monday morning, and the Helix at Dublin City University is slowly becoming a hive of activity as it gears up to play host to tidy town hopefuls.

For Martin Kelleher, the managing director of Musgrave's SuperValu and Centra brands in Ireland, it's just another part of the day job.

He'll be helping to dish out the awards (in the event, Killarney was named tidiest), and in the meantime gaining some exposure for the SuperValu chain, which sponsors the competition.

But the razzmatazz of the Helix is just an aside to the tough conditions that face retailers of any ilk these days -- from grocery purveyors to publicans.

People are spending less, have often seen their paypackets -- if they're still lucky enough to have one -- shrink and are thinking carefully about how they spend the cash they do have.

"There's a level of pressure on households now that obviously finds its way through to grocery, as it should," explains Kelleher, who adds that Musgrave's own research has shown that the typical household had about €60 less a month to spend on groceries following the last Budget.

It may not sound like much, but the multiplier effect of higher fuel prices, taxes, levies and a range of other expenses all serves to depress spending on groceries, which, after rent or mortgages, are typically the next largest household bill.

SuperValu (which controls just under 20pc of the Irish grocery market) and its competitors have all been involved in pretty ferocious advertising campaigns in their efforts to lure shoppers.

A swing towards own-brand goods has been one of the noticeable changes in shopping habits as consumers seek to make their money go further.

Earlier this summer, research from Kantar Worldpanel showed that own label groceries account for almost 35pc of total grocery sales in Ireland compared to just over 32pc in the middle of 2009.

Own-brand products

"What we've seen in the last year at SuperValu is about a 5pc or 6pc growth in sales of own brand products. They're usually about 33pc cheaper," explains Kelleher. "Shoppers are working it out for themselves."

He maintains that in taste tests SuperValu has conducted over the past number of months on all its own brand items, that they beat branded goods in 25pc of cases.

But the National Consumer Agency (NCA) also pointed out during the summer that only tiny differences emerged between Ireland's major grocery retailers for a common basket of goods, and that 37pc of surveyed products had identical prices across Tesco, Dunnes, SuperValu and Superquinn.

The NCA has insisted that grocery retailers are more concerned with price matching rather than price beating.

"If you take the price of certain things that people buy, if any of us are out, you're at a disadvantage, so you have to at least match the price," says Kelleher.

"Promotions make retailers more competitive in certain product areas. I think it's actually a clear signal of the competitiveness of the market rather than anything else."

The NCA probably wouldn't agree, but Kelleher -- as you'd expect -- doesn't buy the agency's stance.

"If you think about it, if a retailer isn't going to be dramatically disadvantaged then that -- price matching -- is the end product."

SuperValu -- which has about 193 stores in the Republic and 41 in Northern Ireland -- differs from other major grocery retailers in the country in that the stores are owned and operated by franchisees.

They're free to introduce their own products and pricing, and benefit from being able to buy the bulk of their stock from Musgrave.

Also in Kelleher's remit are 464 Centra stores around the country, which have had to face the demise of cash-rich, time-poor consumers. The breakfast roll is no more, but Kelleher says the stores have expanded food offerings, for instance, in an effort to attract extra business.

"The convenience sector is tough, but Centra's performance has been astounding," he maintains.

"We have a very clear direction in terms of what the customer wants. But the most dramatic thing was the demise of the breakfast roll. Those type of sales would have been an important part of turnover in some urban stores."

What's been on the minds of some SuperValu franchisees of late is Musgrave's decision to agree to pay in the region of €250m for Superquinn.

The deal still has to be approved by the Competition Authority, but the acquisition is certainly a game changer for the Cork group.

With a higher concentration of stores around Dublin, the business could complement SuperValu's better penetration outside the capital.

Busy summer

Still, industry sources say that Kelleher had a busy summer at so-called cluster meetings of SuperValu franchisees around the country, addressing concerns expressed by some franchisees that Musgrave will divert more money to Superquinn at the expense of their stores.

It's also probably difficult for some SuperValu franchisees that are facing challenges meeting bills (Kelleher says Musgrave has been working closely with any franchisees with cash flow difficulties to find solutions) to see Musgrave forking out to buy another chain.

Superquinn will operate as a standalone business in the Musgrave chain, and sources also reckon it could ultimately help bolster revenues from a tougher cash-and-carry business.

It will also give the combined SuperValu-Superquinn business close to 27pc share of the grocery market, putting it on a par with Tesco -- the current leader.

Total Musgrave sales last year were €4.4bn, down 3pc, and pre-tax profits were up 3pc to €72m.

In the Republic of Ireland, its revenue amounted to €2.6bn from its SuperValu, Centra and Daybreak operations, down 3.6pc on 2009. Retail sales at SuperValu were €2.4bn last year. "Superquinn is a business that we think we can improve from a customer perspective and we have to look at how to get the best from both organisations so as to strengthen it," explains Kelleher, who adds it's too early to say whether Superquinn will remain a Dublin-centric operator.

To be fair, it's not just Musgrave that perceives the planned Superquinn acquisition as a good deal.

Industry insiders also see it as a good one for both Superquinn and SuperValu, and it also serves to underline just how much cash Musgrave is throwing off even in the current environment to be able to finance the transaction.

The announcement of the agreement to acquire Superquinn also found Musgrave on the back foot, however, in relation to enraged suppliers to the former who were about to be stung for millions of euro in unpaid invoices.

Musgrave eventually stepped in to help establish a €10m fund -- subject to the takeover being approved -- to pay those Superquinn suppliers that didn't have insurance for most of what they'd be owed.

Musgrave also moved to give Superquinn suppliers that don't already stock SuperValu stores access to the outlets.

"There are 15 suppliers now supplying both chains and another 25 that we're in discussions with," notes Kelleher.

"The biggest barrier to some extent is often their capacity to grow to meet that extra demand. We don't want them to overtrade, but this is some of the good stuff coming out of the deal."

In the meantime, there's been one high-profile SuperValu casualty of the property downturn.

One of the country's leading SuperValu outlets was placed into receivership earlier this year by Bank of Scotland (Ireland) after its owner, Jim Treacy, used it as security for loans to develop a Northern Ireland golf course.

Kelleher won't be drawn on the events, but says it's not the case that there are many other franchisees who might find themselves in a similar position after having branched out during the boom.

"We'd have a firm understanding of what our franchisees are involved in. Some people are involved in non-retail business aspects. The retail side has generally been their best investment, but we're comfortable with where they are," he says.

While Kelleher expects sales at SuperValu and Centra this year to probably be relatively flat, it's a complaint many companies would relish these days. He has plenty on his plate to keep him busy -- even without the showbusiness.

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