Migros advantage may have short shelf life

Signs are good: Coop has a chance to overtake Migros swissinfo.ch

Migros, Switzerland's largest supermarket chain, strengthened its position in 2005, but a retail expert has told swissinfo that rival Coop should bounce back.

Net profits of the Migros group rose 28.3 per cent last year to a ten-year high of SFr699 million ($545 million), in stark contrast to the 15.6 per cent drop posted by Coop to SFr270 million.

But these bald figures do not tell the whole story, according to James Bacos of Mercer Management Consulting.

Bacos believes Migros is over-reliant on its non-core divisions, such as banking, while Coop is better positioned to ride out competition pressures affecting both companies’ core groceries business.

Migrosbank enjoyed a 2.1 per cent rise on its balance sheet, the Hotelplan travel group saw profits rise by 20 per cent, turnover at Migrol petrol stations grew 17.3 per cent and Globus department store profits doubled.

“These are very good results for Migros as a consolidated organisation, but growth and profit is not coming from food,” Bacos told swissinfo.

“Migros has benefited from the hike in petrol prices and a general improvement in the performance of the banking sector. It has a higher exposure in these areas than Coop. But its food business was stagnant last year and even went backwards if you compare it like-for-like with Coop.”

Discount markets

Competition has hardened in the Swiss groceries sector with the arrival of German discounter Aldi and it is expected to further intensify when Lidl also crosses the border from Germany.

Migros and Coop have both responded by introducing branded discount lines. Migros claimed on Wednesday that the average price of its products has sunk two per cent in the last year.

Bacos thinks Coop is better positioned to withstand the assault on prices combined with higher costs in Switzerland compared to the rest of Europe.

“Migros is more dependent on internal capabilities [producing its own food brands] than Coop,” Bacos said.

“Food retailers in Switzerland have to pay more for supplies than the rest of Europe – upwards of 20 per cent in many cases. Obviously, one important lever for improved profitability is to go to your suppliers to demand lower prices, but Migros will have a hard time making these demands of itself.”

Consortium

Bacos points out that Coop has just entered a buying consortium called Coopernic with Rewe [Germany], Conad [Italy] and Leclerc [France] which he says has strengthened its hand considerably.

“This will allow Coop over a period of time to realise a greater purchasing power. I think Coopernic will really help Coop to grow faster and be more profitable in the coming years,” he said.

But Bacos thinks the two leading Swiss supermarkets have done enough to see off the German discounters in the mid-term.

“Both Migros and Coop reacted wisely – they realised they were too expensive and made intelligent changes to their entry-level prices,” said Bacos.

“It’s still an open question whether Aldi and Lidl can make substantial inroads into the Swiss market.”

swissinfo, Matthew Allen

In brief

Migros and Coop have a combined food market share of around 70% in Switzerland (Migros 50%, coop 20%).

Swiss discounter Denner is the third-largest supermarket chain with over 700 stores since it acquired Pick Pay in November last year.

German discounter Aldi opened its first store in Switzerland in October 2005 and has plans to expand into 23 towns in the near future. Lidl, also German, has yet to arrive in Switzerland.

Key facts

Migros 2005 results:
Group net profits: SFr699 million (2004: SFr545 million)
Turnover: SFr20.39 billion (+0.4%)
Staffing levels: 81,049 (-1,223)

Coop 2005 results:
Group net profits: SFr270 million (-15.6%)
Turnover: SFr9.5 billion (-1.1%)
Staffing levels: 37,370 (-4.9%)