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Kaufland in Australia— Europe's Biggest Retailer Heads Down Under

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Kaufland in Australia— Europe's Biggest Retailer Heads Down Under June 28, 2017 The biggest retailer in Europe, Schwarz Group, is reportedly Deep Dive: bringing its Kaufland discount hypermarket format to Australia. Kaufland in The company told us that it is still scoping the market. 1) Kaufland could capitalize on the strong Australian consumer Australia— demand for value groceries, which would place pressure on Europe’s Biggest the dominant grocery retailers, Coles and Woolworths. 2) However, Kaufland’s ability to build share in a developed, Retailer Heads consolidated retail market is untested. So far, Kaufland has launched outside Germany only in Eastern European Down Under countries. 3) We think Kaufland would face greater challenges in nonfood categories. It would be entering a market that not only has a number of incumbent value general merchandise retailers, but also one that is set to see more and more nonfood sales migrate online. Deborah Weinswig 4) In short, there are opportunities for a discount grocery Managing Director, Fung Global Retail & Technology offering in Australia, but we think any major addition of [email protected] nonfood space would be challenging in a sector that will see US: 917.655.6790 more sales switch out of brick-and-mortar stores. HK: 852.6119.1779 CN: 86.186.1420.3016 Deborah Weinswig, Managing Director, Fung Global Retail & Technology [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 1 Copyright © 2017 The Fung Group. All rights reserved. June 28, 2017 Table of Contents Introduction ..................................................................................................................................... 3 Kaufland: Key Facts .......................................................................................................................... 4 Kaufland in Australia: Prospects ....................................................................................................... 6 A Paucity of Competition ....................................................................................................................... 6 Higher Food Prices Create an Appetite for Discounters ........................................................................ 7 Established Competition in Nongrocery ................................................................................................ 8 Making Kaufland Work in a Developed Retail Market .......................................................................... 9 Availability of Space ............................................................................................................................... 9 Tapping a Smaller Retail Sector ............................................................................................................. 9 Key Takeaways ............................................................................................................................... 10 Deborah Weinswig, Managing Director, Fung Global Retail & Technology [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 2 Copyright © 2017 The Fung Group. All rights reserved. June 28, 2017 Introduction German discount hypermarket chain Kaufland is set to be the next If Kaufland launches in Australia, international retailer to launch in Australia, according to a number of media it will be joining international reports. The company told us that it is only scoping the market, saying: names in value retail such as Aldi, Costco, H&M and TK Maxx. We are currently reviewing the Australian market in terms of potential market entry. We [will] examine the competitive situation, … the real estate market, as well as the situation in the labor market. Only after completion of [these] studies are we in a position to decide a possible market entry. If Kaufland launches in Australia, it will be joining international value retail names such as Aldi, Costco, H&M and TK Maxx that have already moved into the country. In April, Amazon announced that it, too, will launch in Australia, and Decathlon looks set to open its first stores in the country soon. Kaufland’s launch was reported in March, and it is currently advertising on its website for locations. The company is owned by Schwarz Group, the biggest retailer in Europe. Schwarz Group is a privately owned German company that also operates Lidl discount supermarkets. In this report, we discuss the tailwinds that could drive Kaufland’s expansion in Australia and the headwinds the company could face there. We also offer some key facts to introduce readers who are unfamiliar with Kaufland to the company’s operations. In 2016, media reports speculated that Kaufland sister chain Lidl could enter the Australian market, too. The Sydney Morning Herald, for instance, reported in September 2016 that Lidl had contacted Australian suppliers and applied to register trademarks in the country. However, in November 2016, RealCommercial.com.au reported that a representative of real estate firm Colliers International had claimed that Lidl had scouted the Australian market and decided against launching there. Whether Lidl decides to move into Australia or not, much of the content in this report is as applicable to Lidl as it is to Kaufland. Meanwhile, Schwarz Group is expanding elsewhere: Lidl will open its first US stores in mid-June. Readers may also be interested in the following May 2017 reports: • Deep Dive: Aussies, Get Ready for Amazon! • Lidl US Update: Answers to Four Key Questions Deborah Weinswig, Managing Director, Fung Global Retail & Technology [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 3 Copyright © 2017 The Fung Group. All rights reserved. June 28, 2017 Kaufland: Key Facts Kaufland generated revenues of US$25.4 billion in 2016, according to Euromonitor International. It is the smaller part of the Schwarz Group, Kaufland generated revenues of which reported US$99.8 billion in group sales in the year ended February US$25.4 billion in 2016. 2016. Lidl contributed the remainder of Schwarz Group revenues. Figure 1. Kaufland: Worldwide Sales Metrics, 2016 EUR USD Sales (Bil.) 22.98 25.43 Sales per Store (Mil.) 20.14 22.29 Sales per Sq. M. (Thous.) 5.01 5.54 Sales per store and sales per square meter are calculated using average annual store numbers and average annual sales area, respectively. Source: Euromonitor International/Fung Global Retail & Technology Kaufland’s 1,148 stores averaged 4,017 square meters (43,223 square feet) of selling space in 2016. Recently opened stores in Germany have included around 3,300 square meters (35,508 square feet) of selling space. Kaufland’s new Australian website says that it currently operates 1,230 stores worldwide. Figure 2. Kaufland: Worldwide Space Metrics, 2016 Year-End Store Number 1,148 Year-End Sales Area (Thous. Sq. M.) 4,612 Average Store Size (Thous. Sq. M.) 4.02 Source: Euromonitor International/Fung Global Retail & Technology According to Euromonitor, the grocery category accounts for around 80% of Kaufland’s German sales, with the remaining 20% made up of nongrocery sales such as apparel and general merchandise. Unlike Lidl, which focuses very strongly on private labels, Kaufland stocks a range of major third-party brands in grocery categories. Kaufland stores offer up to 60,000 stock keeping units (SKUs), per the company’s Australian website. Recently opened stores in Germany have offered around 20,000 SKUs, according to company press releases. In 2016, 640 of Kaufland’s stores In 2016, 640 of Kaufland’s stores were located in Germany. The remaining were located in Germany. 508 stores were located across Poland, the Czech Republic, Slovakia, Bulgaria, Romania and Croatia. Deborah Weinswig, Managing Director, Fung Global Retail & Technology [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 4 Copyright © 2017 The Fung Group. All rights reserved. June 28, 2017 Figure 3. Kaufland: European Presence Source: Company reports/Fung Global Retail & Technology Kaufland has built scale by serving customers in less affluent regions. Prior Australia would be the first new to its East European expansion, Kaufland piled into the eastern states of market for Kaufland outside Germany following reunification in 1990. Australia would be the first new Eastern Europe. market for Kaufland outside Eastern Europe—and, so, its first entry into a developed retail market. • Kaufland is advertising for plots of land of at least 10,000 square meters, and preferably of 15,000–20,000 square meters. • The Sydney Morning Herald reported in March 2017 that Kaufland’s Australian headquarters will be in Melbourne. • Given the company says it is still reviewing the market, there are no details of where it would open stores, or how many stores it would open. As of June 1, 2017, the company’s Australian website was advertising no job vacancies. Deborah Weinswig, Managing Director, Fung Global Retail & Technology [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 5 Copyright © 2017 The Fung Group. All rights reserved. June 28, 2017 Kaufland in Australia: Prospects The Major Tailwinds Are in Grocery: A Sector Duopoly and Consumer Appetite for Discounters A Paucity of Competition Two retailers, Woolworths and We see opportunities for Kaufland to capture grocery market share from Coles, account for almost 70% of incumbents in a supermarket sector that is characterized by an unusually Australian supermarket sector low level of competition. Two retailers, Woolworths and Coles,
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