Europe's retailers had barely wrapped the last presents for harried holiday shoppers before they resumed their own buying spree. On Jan. 7, France's No.5 retailer, Promodes, announced it would plunk down $293 million for a 27.5% stake in GB, Belgium's No.1 grocery chain. A day earlier, Marks & Spencer PLC of Britain announced it had bought a Frankfurt store from rival Hertie Waren- und Kaufhaus, bringing to 30 the number of new locations it plans to open on the Continent in the next three years.
The race to dominate retailing in the next century is getting red-hot. With the advent of the euro less than a year away, big merchants like M&S are rushing to create Europewide store networks. When the euro kicks in, easier comparison shopping will send consumers across borders looking for bargains on big-ticket items such as televisions and refrigerators. And retailers are fending off U.S. heavyweights such as Wal-Mart Stores Inc., now invading their home turf. The upshot: Cutthroat competition is about to get even tougher. "Retailers who don't have low costs and who can't compete on price are going to get slammed," says analyst Roel Gooskens at HSBC James Capel in Amsterdam.
BUY AND BUILD. The weak will quickly be swallowed by rivals hungry to expand. That's because most European countries restrict construction of large, new stores. France has one of Europe's toughest laws, designed to protect mom-and-pop operations. Any store bigger than 300 square meters must be approved by a special building commission.
The rule has sparked a string of mergers and attempted takeovers in France. Before pursuing Belgium's GB, Promodes mounted a hostile $5.19 billion bid for hypermarket chain Groupe Casino, in an effort to create France's largest food retailer. After four months of bitter legal wrangling, the companies called a truce on Dec. 29 and agreed to combine forces only in emerging markets such as Poland. Some analysts believe a full merger is inevitable.
French retailers are also enlisting foreign partners in the search for sales growth. In a $900 million deal, hypermarket chain Auchan recently merged its Italian operations with Gruppo Rinascente, Italy's largest department store and part of the Agnelli family empire. And analysts say Casino has held talks with the Milan-based Standa supermarket chain.
One reason for all the maneuvering is that North American retailers are on the prowl in Europe. Wal-Mart, the world's biggest retailer with sales of about $117 billion, recently said it would buy Wertkauf, a privately held chain of 21 hypermarkets in Germany. That's a tiny presence, compared with Wal-Mart's 2,784 stores in the U.S. But analysts figure the Wertkauf acquisition is a first step in learning how to adapt the Wal-Mart blend of low prices and customer service to European tastes. "Our intent is to become the dominant player in every market we enter," says Wal-Mart International CEO Bob L. Martin.
Why so much fighting over a market that analysts expect will grow an anemic 1% annually in the next few years? As the euro accelerates Europe's shift from fragmented national markets toward an integrated one, well-positioned retailers will win big. Efficient giants such as Carrefour in France and Ahold in the Netherlands, which enjoy economies of scale and purchasing clout, will boost their cost advantage over rivals.
Specialty retailers with clear strategic focus will shine, too. Swedish group Hennes & Mauritz, a purveyor of fashionable clothes at reasonable prices, has successfully elbowed into Germany, Austria, and Belgium. Analysts credit H&M's savvy merchandising and tight inventory control for its success. The company opened 50 stores in 1997 and plans to open 50 more this year.
SHOE PINCH. The losers are likely to be small and midsize companies, many of them family-owned. Consolidation could be especially strong in Germany. In shoes and apparel, for instance, 42% of sales occur at small chains or individual shops, vs. just 16% in Britain.
Several of Europe's big, unwieldy retail conglomerates may find themselves under increasing pressure, too. Market watchers say that Germany's Metro, with $34 billion in sales spread among more than a dozen divisions, from groceries to shoes to consumer electronics, lacks focus and responds slowly to consumer trends. Likewise, Belgium's GIB, the holding company that owns grocery chain GB, is a confusing mishmash of businesses, from the Quick fast-food chain to Inno department stores, that will have difficulty surviving against more efficient rivals.
While they scrap on their home turf, some retailers are also moving beyond Western Europe to tap into fast-growing emerging regions such as Eastern Europe and Latin America. Carrefour has a jump on rivals at the moment, with a total of more than 100 stores in Asia and Latin America. But Ahold is moving aggressively to catch up. By 2000 the company could have 1,400 new outlets in emerging markets, according to management consultant Roland Berger & Associates in Munich.
Looking beyond the core Continental countries for growth makes sense. In Germany, Europe's largest market, retail sales slumped 3% in 1997, adjusted for inflation--the fifth annual slide in a row. Analysts expect that with unemployment stuck close to 12%, 1998 will be a down year, too. The industry is shedding about 30,000 jobs a year as stores pare back or close.
Nevertheless, competitors such as Marks & Spencer and Wal-Mart are likely to continue piling in. For one thing, German retailers' miserable service leaves an opening for customer-friendly rivals. For another, the relative weakness of the German mark and sluggish economy make acquisitions easier to justify. M&S is paying up to 40% less for real estate, such as its first German store, in Cologne, than it would have five years ago, says Clive Nickolds, the company's director for Continental Europe.
Clearly, more multinational companies are fighting over a pie that isn't getting any bigger. It's a frightening prospect--but one European retailers will have to get used to.