Nordic Food Markets - 4. Competition in retailing

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"Nordic Food Markets"

4. Competition in retailing

4.1. Introduction

Competition in the retail sector may be considered national, regional or local. Consumers do most of their shopping near to home or place to work, this indicates local or regional markets. However, the marketing chains, which for a large part are national wide, set maximum prices, decide profile, strategy and to a large degree the assortment available to the shops. This indicates national relevant markets. Different conditions for competition in the national or regional markets could therefore explain some of the differences in prices pointed out in the previous chapters.

Surveys indicate that the structural change in the retail sector in the Nordic countries have many features in common with other countries.

The number of food retail shops has declined over the past decade all over Europe, which are connected with the growth of supermarkets. Particularly in the Northern Europe food retail has concentrated with the supermarkets⁴³, whereas food retailing around the Mediterranean to a greater extent still is composed of a large number of small family-owned specialty shops.

The number of supermarkets per capita is high in the Nordic countries – however, the population density in most Nordic countries is low.

The concentration of food retailing in the supermarket sector is coinciding with a more distinctly split into different kinds of shop types. In particular, discount shops and hyper-markets have had a significant rise in market shares. Discount shops have low prices and a narrow portfolio while hypermarkets have a broad portfolio and high focus on promotion sale to be able to match the discount sectors.

The retail sector has become more concentrated, especially in the Nordic countries where only 4-6 retailing groups are left in each country. The concentration has strengthened the groups' position and buying power when negotiating with the suppliers significantly. This might lead to lower prices to the benefit of the consumers, provided that there is sufficient competition between the retail chains. But fewer companies also means less competition if the markets have barriers to entry.

Internationalisation has increased in the Nordic countries with a number of new cross-border partnerships and mergers between Nordic retailers and companies in other countries. This has influenced the competition conditions in several ways. Internationalisation widens the markets and leads to an increasing import which can prevent local monopolisation.

Costs are high in the Nordic region; among this labour costs and wages represent a significant share of total cost in the retail sector. Thus, labour costs is one of the possible explanations of the high prices on food, however differences in labour productivity must be taken into account, too.

4.2 Structure and structural changes

4.2.1 Structural changes

Over the past 10-20 years, the food retail trade in Europe has experienced a steady decline in the number of shops, for the most part small shops and primarily specialty food shops. Among other significant trends are an enlargement of the big supermarkets and ever increasing concentration of retailers in purchasing groups and chains.

Supermarkets, i.e. shops where a household can buy all kinds of goods (incl. food) to satisfy their ordinary demand, account for approximately 80-90 per cent of retail sales of food products in the Nordic countries and in the EU, and it is therefore this sector of the retail trade which is the focus of comparisons among these countries. The number of specialty shops is largest in Southern Europe, but sales per shop are considerably below those of supermarkets.

There are several reasons for the progress of the supermarket in the retail sector. Low prices and a relatively – compared to kiosks and specialty shops - large assortment of goods inclusive non-food are among the most important. The service level is lower than in speciality shops. Self-service makes it possible to gain savings on wages for sales assistants. It becomes commercially viable to serve a larger crowd per store with many more products. Economies of scale can thus be achieved in retailing. Larger stores provide the basis for a wider product range that may attract customers. Furthermore, this make it possible to benefit from large-scale distribution, administration and marketing as well as advantageous bulk purchasing from suppliers.

4.2.2 Size and density of shops

The structural changes in the Nordic countries have been more or less parallel. In all the Nordic countries the number of shops has decreased considerably in the period since 1990 and although it has not happened to the same extent as during the previous 15-20 years, there has nevertheless been a decrease of 30-40 per cent in the number of shops in all the countries.

Whereas overall changes by and large have been the same, the picture is somewhat different when it comes to today's number of shops. Measured against population figures, i.e. the number of consumers, the density of shops throughout the Nordic countries is relatively high, with Norway at the top. In comparison with other countries, such as Germany, the Netherlands, France and the UK, the figures in the Nordic countries are high, in particular compared with the Netherlands and the UK where shop density is as low as two to three shops per 10,000 inhabitants. This is less than half the number in the Nordic countries. With the relatively few shops per 10,000 inhabitants, average sales per shop are likely to be higher in these countries.

Table 4.1. Number of shops and population figures, 2002

Source: The statistics authorities of selected countries, European Retail Handbook 2003/04 and own estimates.
Note 1. This number includes shops that belong to chains in the respective countries, i.e. it is exclusive of specialised food shops and kiosks.
Note 2. Includes small shops.

Fewer shops per 10,000 inhabitants in turn means that consumers may have to travel longer distances depending on the density of the population and where people choose to live. It appears from chapter 3 that the population density of all the Nordic countries, except Denmark, is 20 or less inhabitants per square kilometre whereas the inhabitant/square kilometre ratio in Germany, the UK and the Netherlands is well above 200. In Denmark and France the figures are between these extremes with 110-130 inhabitants per square kilometre which indicate that consumers may have longer distances to their shops.

It may be argued that table 4.1 does not take proper account of the settlement pattern. Households are not distributed equally across the country. A relatively high percentage of the population lives in cities and more urban areas, and the supermarkets are located fairly close to their customers.

The accessibility to supermarkets in the Nordic countries compared with a few selected countries in Europe is shown in table 4.2.

Four of the Nordic countries – Iceland, Sweden, Finland and Norway – trail in comparisons of number of shops measured against area, whereas Denmark is close to the Netherlands and Germany with the most supermarkets per square kilometre.

Table 4.2. Shop accessibility and urbanisation, 2002

Source: The statistics authorities of selected countries, European Retail Handbook 2003/04 and own estimates.

The degree of urbanisation varies somewhat among the countries and the difference is largest among the Nordic countries. In Iceland, 93 per cent of the population lives in urban areas, whereas in Finland it is only 59 per cent.

In the valuation of this settlement pattern it is worth noting land-use-planning legislation and regulation of opening hours in the individual countries (cf. also section 4.5). For example has the aim of Dutch zoning legislation for years been to curtail car driving. This has been essential to the survival of many small shops as an alternative to the relocation of big hypermarkets. In Germany it has been said that price pressure by consumers, restrictive zoning laws and one of the strictest sets of rules on opening hours in Europe have meant that developments in the retail sector have been aimed at launching discount concepts with low prices and a limited product range rather than at investing in shop design, marketing and IT. Countries such as France and the UK have experienced a more diversified development of the retail sector and more resources have been allocated to innovation.⁴⁴

Today, the hypermarket sector in France is one of the largest in Europe. Shopping is largely done outside of the towns and cities. There are approximately 700 shopping centres and the sector accounts for 25 per cent of total shop floor space. In addition hereto, there are many small food shops in towns. Traditionally, France has not had many discount stores, but this sector is growing.

Figure 4.1. Distribution of shop floor space in the Nordic countries- 2002 – Share of sales

Source: AC Nielsen: Nordic Grocery Insight – 2004, and own estimates for Iceland.

Also among the Nordic countries, the types of shops vary. By far most big stores – so-called hypermarkets with sales areas of more than 2,500 square metres – are found in Finland whereas relatively small shops, defined by sales area per shop, predominate in Norway and Iceland. Shop types in Sweden and Denmark are fairly similar, although Swedish shops in general are bigger than Danish shops.

Over the last 10 years, the share of total sales deriving from hypermarkets has grown noticeably in Finland and Sweden, while growth in Denmark and Norway has been negligible. In Denmark and Norway the most significant increase has been in the turnover from shops in the 400-999 square metre categories, due in part to the rise in the number of soft discount stores in these two countries.

Thus, total shop floor space has increased in all the countries, but most in Finland where shop floor space from 1995 to 2003 increased by 20 per cent (12 per cent in Sweden, 8 per cent in Denmark and 4 per cent in Norway⁴⁵). Taking into account that there has been a decline in the number of shops, it is evident that the sales area of individual shops has been extended significantly⁴⁶.

4.2.3 Ownership and chains

Ownership of supermarkets has become more concentrated either through mergers or through growing market shares.⁴⁷ This is due to a number of factors.

First, it has become increasingly common that a number of supermarkets are owned by the same company or group – often designated capital chains. There has always been profitable supermarkets which have expanded by establishing new stores in different areas and acquiring new outlets possibly following a change of ownership. In so doing, chains of stores have been created and it has been possible to take advantage of the experience of successful organisation of purchasing and sale, common management, economies of scale in purchasing, etc. As a result, the most profitable chains today comprise several hundred stores – and some chains have expanded internationally.

In other cases, independent retailers have agreed to cooperate in certain areas, such as purchasing and marketing. This cooperation can take a variety of forms and bind the members to a lesser or greater extent. However, the more binding forms of cooperation, in areas such as shop layout, marketing, including highest recommended prices, IT systems and product range, seem to be gaining ground. This type of cooperation is not by way of a capital chain, but instead in the nature of a voluntary chain. The owners of the individual shop may leave the chain and perhaps join another organisation.

Box 4.1. Different types of chains

Second, there is a pronounced trend towards vertical integration of retailers and wholesalers both among supermarkets owned by the same group and among independent retailers. The scale of integration varies.

The strongest form is where the wholesaler and the supermarket are fully integrated, i.e. owned by the same group such as it is the case with Føtex in Denmark and Baugur in Iceland. Another example of integration is retailers' holdings of shares or other participating interests in the wholesale company, for example ICA in Sweden and the independent cooperative stores of Coop Norden.

Finally, there are still several supermarkets/chains which are not connected to a wholesaler through ownership, but merely through cooperation agreements. These are among others Spar.

The trends towards integration are thus horizontal as well as vertical. In the Nordic countries these days there are hardly any supermarkets that are not parties to some form of marketing and purchasing cooperation. New supermarkets are usually established within the framework of a large system, for example by joining one of the existing voluntary chains or as additions to capital chains. Fully vertically integrated systems are, to our knowledge, only aimed at supplying own stores and there are no examples of new supermarket entrants having been supplied from any of these suppliers.

However, because of the advantages achievable from vertical integration, today there are only a handful of grocery wholesalers competing to offer their products to supermarkets on the most favourable terms, cf. box 4.2.

Officially, Coop Norden acts as a wholesaler to the retail trade, but in practice it only supplies independent stores, which are members of the cooperation.

Below, the (not –integrated) wholesalers are highlighted in grey in the chart - except Coop Norden.

Box 4.2. Purchaser to supermarkets/wholesalers in the Nordic countries

Such level of concentration may raise the question of market access for new supermarkets. If the vertically integrated chains continue to gain market shares and crowd out traditional grocery wholesalers, there will be even fewer opportunities for an independent retailer to get established on the market with a few shops, as it will be impossible to find a wholesaler that will supply on competitive terms.

Moreover, there are examples where control with shop-property is regarded as very important. Some retail groups stake a lot on control with property and tenancy agreements, e.g Axfood in Sweden owns the shops and rents these out to other chains.

4.2.4. Shop types and profiles

Concurrently with the enhanced horizontal and vertical integration, shop types and profiles have become more clear-cut and uniform. Today, all supermarkets are associated with a marketing chain to which it is essential that all stores appear alike. Consumers should be able to find (a number of) the same products on the shelves and at the same (maximum) prices. Furthermore, chain stores use the same design and layout modules (same colours, facades, flooring, wall covering, checkout counters and shelving). This creates an impression of unity designed to distinguish the chain from its competitors and help develop a preference for the chain and not only the individual store.

It also means that the selection of products does not change much from one store to another, especially in the discount chains with their narrow assortments. Large supermarkets and hypermarkets offer a more varied product range within the framework of the chains assortment.

A contributing factor to this trend towards more clear-cut and uniform profiles is modern IT systems which enable the registration and processing of large amounts of data. Data which are capable of showing the elements and relations of a given business system that are most efficient in terms of sale and which may increase the amounts the individual stores contribute to the total earnings of the chain. The chain management will seek to apply this knowledge systematically to increase efficiency, and with that earnings. As a consequence, the individual store's scope for initiative is curtailed and stores become largely more uniform.

While this situation may result in a uniform appearance in the competitive environment, it also raises consumers' awareness of new initiatives, and the effect of even small changes in important areas may be significant.

The division of the supermarket sector into shop types varies slightly from country to country. Normally the supermarket sector is divided into discount markets, ordinary supermarkets (possibly divided into large and small supermarkets) and hypermarkets. Mini markets border on the supermarket sector, but usually do not carry the full range of products, such as fresh meat, and thus belong to the kiosk sector. Box 4.3 provides an outline in schematic form of the differences between the various shop types; reality, however, may deviate somewhat from the outline. In the Nordic countries, hypermarkets are usually defined in accordance with the standard of 2,500 square metres set by the consultancy firm ACNielsen in its surveys. This includes extraordinarily large hypermarkets of well above 10,000 square metres concentrating on a wide product range, many bargains and a sizeable non-food section.

Box 4.3. Characteristics of different types of shops

Source: Dlf - Conference 2005 (Contribution by Peter Bo Rützou, Kavli )

The shop type, which has attracted most attention during the past years is the discount market. Discounters offer a limited range of products in the order of 600-1,500 items, low prices and traditionally an austere shop layout. Over the past 10-15 years discount markets have thrived in all countries, chiefly due to the low prices of primary groceries.

On an international scale, a distinction is made between hard discounters and soft discounters. There is no precise definition of hard and soft discount, but hard discounters operate with low service, high rate of turnover, lowest possible costs and pursue a policy of low prices most persistently. They carry few items, many of which are private labels. Soft discounters, on the other hand, also use other parameters in the marketing and carry a more balanced selection of brands and private labels. International hard discounters are Aldi and Lidl. Netto⁴⁸ and Sale are among the soft discounters in the Nordic countries.

It is mainly the hard discounters which have influenced developments and gained market shares internationally, cf. figure 4.2.

Figure 4.2. Development in the market shares of hard and soft discounters in Europe 1991-2003

Source: ACNielsen: Development of the discount market in Europe, particularly the Nordic countries. Danish Association of Groceries Distributors. 2004

In the Nordic countries the situation is different. Until Lidl's market entry in Finland in 2002, hard discounters were only present in Denmark where the Aldi chain had set up in 1977. However, if soft discounters are taken into account, the Nordic countries are among the countries with most discount stores, cf. figure 4.3. According to the figures shown, the market share of discounters is largest in Norway with more than 51 per cent. However, these soft discounters differ from the discounters in other European countries. The product portfolio is wider, typically 2,500-3,500. The figures are from 2003, i.e. before Lidl entered the Norwegian market. The market share of discounters is also high in Iceland (38 per cent) and Denmark (27 per cent), whereas it is considerably lower in Finland and Sweden (13 per cent and 11 per cent, respectively).

Figure 4.3. European Discounters in 2003 – Market shares per country

Source: ACNielsen (http://www.dansk-dlf.dk/) and own estimates for Iceland

Iceland, Norway and Denmark are also the countries which have seen the fastest growth in the discount sector in the period from 1998 to 2003. In Iceland the market share of discounters rose by 18 per cent, in Norway by 16 per cent and in Denmark by approximately 6 per cent. In Norway as well as in Denmark, the rise has occurred only within soft discount, whereas Sweden has seen an increase in hard discount of almost 5 per cent and Finland of almost 3 per cent. In Sweden and Finland, where Lidl made its entry into the marketing respectively in 2002 and 2003, it meant a decrease in the general price level. In Sweden surveys indicate that prices of the retailers own brands⁴⁹ decreased with about 2 per cent as a result of Lidls entrance⁵⁰, and in Finland the decrease on average was about 1 per cent⁵¹ and besides that the large Finnish retail chains usually have lower price levels in the areas where Lidl-outlets are present.

The success of hypermarkets witnessed throughout the European retail sector has, in the Nordic countries, been most pronounced in Sweden and Finland, where the share of total groceries sales attributable to hypermarkets 1995-2002 rose from 18 per cent to 30 per cent in Finland and from 13 per cent to 21 per cent in Sweden, cf. fig. 4.4. The shares in Denmark and Norway, in particular, are lower with 17 per cent and approximately 5 per cent, respectively. In countries such as France and the UK, hypermarkets are much stronger accounting for more than 50 per cent of total sales, whereas the average in Europe is around 30 per cent.

Figure 4.4. Hypermarkets' share of total sales in the retail sector

Source: ACNielsen. Conference 2004

While the hard discounters, in particular, profile themselves through their prices, many hypermarket chains take a different approach and seek to distinguish themselves by offering special quality products, foreign products, organic products or particularly healthy products. Certain small chains may target the customers within a specific region.

The size of the chains varies some in terms of numbers and sales. In Denmark and Norway there are discount chains with about 350-400 stores and the average sales⁵² per store in the largest discount chains in Denmark, Norway and Finland is around € 4-5 million. The number of discounters in Sweden is less than in Norway and Denmark and their market share is significantly smaller. On the other hand, discounters in Sweden are relatively big as are Swedish supermarkets in general. Average sales per store of the marketing chain Willys, which is part of the Axfood group, are above € 13 million.

A number of the marketing chains are international. The scope of internationalisation may vary: Cooperation in the field of purchasing, concept development and techniques, common labels and marketing. In terms of cooperation in the field of marketing, the Spar chain is present in Denmark, Finland, Norway, Sweden and another 30 countries worldwide. Edeka stores are found in Denmark. The German discount chains Lidl and Aldi have also made their mark on the Nordic discount sector. Also chains based in the Nordic countries have ventured abroad in an attempt to gain a foothold in other countries, cf. box 4.4.

Box 4.4. Internationalisation of Nordic chains

Although name, logo and the overall concept are the same in several of the Nordic countries, the way in which a Netto store is run in Denmark may differ considerably from the way in which it is run in Sweden. The selection of products and marketing strategies are adapted to the local market, and in particular so is the range of food products as only a small number of items will be common in both countries. The cross-border chains have stated that as much as 80-90 per cent of the food products offered in the stores in two Nordic countries may be different⁵³. So, if we look at the Nordic market less than 5 per cent of branded packages for food products are the same. The marketing is completely separate and only aimed at the national market. To some extent, this is also the case for Aldi and Lidl. Both have a very large number of private labels – more than 80 per cent of the assortment is private label products – and the differences in their selection of products from one country to another are almost exclusively within the fresh food group.

4.2.5 Cooperating in purchasing

The advantages to supermarkets of cooperating in the field of purchasing are considerable. It means bulk buying and an opportunity for negotiating huge discounts with suppliers. In addition, bulk buying facilitates the purchase from distant suppliers, as transport costs per unit are reduced. Also, the handling of any public authority requirements (customs duties, taxes, contents documentation and labelling) will be less onerous.

On top, collective purchasing helps ensure uniformity of stores. The stores receive the same products packaged and labelled in the same manner. It may be a factor in reinforcing chain identity and the perception of unity, which the marketing seeks to spotlight. This is particularly useful in the chains' marketing of own brands (private labels).

Purchasing for the supermarkets in the Nordic countries is in the hands of only a few players. Chains are grouped under four to six umbrella organisations in each country, which together represent 80-90 per cent of grocery sales.

Figure 4.5. The largest retailer groups in the Nordic countries – market shares, 2002

Source: ACNielsen. Nordic Grocery Insight 2004.

Under each umbrella organisation there are several marketing chains, an exception is Rema 1000 in Norway which only organize one chain. ICA Sweden, for example, is responsible for purchases for all Swedish supermarkets operating under the logos Ica Nära, Ica Supermarket, Ica Kvantum and Maxi Ica Stormarked.

To the three or four large purchasing groups should be added the international discount chains such as Aldi and Lidl whose shares in the Nordic market are not significant, but overall they possess substantial purchasing capacity. The implications are that five to six chief buyers decide which products to buy for the supermarkets in each of the Nordic countries. However within some chains it is possible to choose from the assortment decided by the single shop in the marketing chain, e.g local products.

Several of the Nordic umbrella organisations take part in more or less formalised cross-border cooperation which allows the buyers the additional advantages of purchasing for more countries. Coop Norden aims to enter into agreements covering all the cooperative members in Denmark, Norway and Sweden. Coop also cooperates with the S-Group in Finland. ICA Norge ASA is a subsidiary of the Swedish ICA AB which is 60 per cent-owned by the Dutch Royal Ahold, one of the largest retail groups worldwide. There is also cooperation in the field of purchasing with the Finnish Kesko. Norgesgruppen, Axfood, Tuko Logistics and Supergros cooperate through the purchasing organisation United Nordic Inc. AB. Edeka Danmark is partly owned by the German purchasing organisation Edeka Zentrale which is one of the largest purchasing companies in Europe.

In addition, a number of the Nordic purchasing groups are members of international groups designed to benefit from collective purchasing at an international scale. The Spar chain with stores in four Nordic countries is present in 34 countries worldwide. The chain operates a system of collective purchasing of more than 300 products. ICA, Dansk Supermarked and the Kesko-Group in Finland all participate in the AMS purchasing system.

Similar pooling of purchasing capacity is found in most other EU countries. The table below shows the percentages of the largest and the three largest (CR1 and CR3) organisation in selected countries. Concentration in the Nordic countries is greater than in any of the other countries except from the Netherlands, where one retail group (Ahold) has a market share of more than 40 per cent.

Table 4.3. Concentration in the retail sector, 2002/03

Source: ACNielsen and Retail Handbook.
Note 1. CR= concentration ratio
Note 2. HHI = Herfindahl-Hirschman Index is a concentration index. The HHI is defined as the sum of the squares of market shares of all the firms in the relevant market. The HHI will vary between 0 (an atomistic market) and 10 000 (monopoly) if market shares are measured in percentages, or equivalently between 0 and 1 if market shares are measured as decimals. Since the shares are squared the HHI will put more emphasis on large than small firms. For example, the HHI contribution of two firms having 20% market shares each is = 400 + 400 = 800/0.08. The contribution of one firm having 40% is = 1600/0.16.

4.3. The role of non-food and shop-in-shop

Chains set their prices so as to maximise earnings. High prices can lead to a decrease in sale which makes it important for the retailers to find the optimal combination between price and sale. The objective therefore is to sell as many products as possible at high prices and low costs. Price and cost for each article in the total product assortment of the supermarket must be considered carefully. Sale of food is only a proportion of supermarket sales, but it is of paramount importance to the aggregate earnings.

The range of food products offered by shops with limited floor space, for example discount markets, is narrow and not very deep (as little as 6-700 items in some cases). The number of items will increase in line with the shop space. But the number of food products will not increase at a similar pace.

First of all, the proportion of non-food products will usually increase compared to that of food products, including everyday groceries. In supermarkets overall, the share of non-food has increased and today accounts for approximately 10-15 per cent in discount stores and small supermarkets, more than 30-40 per cent in large supermarkets and up to 45-50 per cent in hypermarkets.⁵⁴ Discount stores have gradually increased their share of non-food. The non-food will often consist of a very narrow range of low-priced products, which change from one week to the next.

The term non-food covers a wide spectrum of products such as health and beauty products, clothes, electronics, hardware, tools, gardening implements, etc. A wider range of food products leaves the consumers with more choice of day-to-day shopping for food and drinks. A wider range of non-food products makes it possible for consumers to have all their demands – in addition to the shopping for food – satisfied in one and the same place – one-stop-shopping. On top, in retailing, gross margins on several non-food products are high compared to the margins on food which supermarkets traditionally operate with. Hence, it may prove profitable to include non-food products in the range and possibly sell them at prices which are lower than those charged by shopping goods retailers.

Some chains – mainly large supermarkets/hypermarkets – reduce prices on certain articles for short periods of time so that they act as ”traffic builders” attracting customers. Certain food products are well suited for that purpose. Favourable prices on products such as beverage, coffee or in-season products may attract customers⁵⁵. The loss of profits on food is offset by slightly higher prices on other articles of less importance to consumers' choice of shopping facility, but which complement the article on offer or tempt consumers as they pass by them in the supermarket – impulse buying. Where food products are used in this way, supermarkets create a system of promoting reduced prices on attractive articles that change every week while at the same time carrying a wide and deep range of other articles to complement the shopping.

Once shop sales areas become bigger, it is logical to devote more space to attractive displays inside the shops. Instead of long drab rows of products there will be more room for special arrangements, events, taste sampling and promotional initiatives. In the large supermarkets (hypermarkets in particular) shop-in-shop concepts are common. Most of them sell foods such as butchery, delicatessen and cheese and often resemble convenience stores where consumers can buy (small) ready-made dishes, lunches, coffee, meat balls, etc.

The contrast is the discount markets which aim to attract customers by always offering low prices on all groceries, including food. The ambition of discount markets is to become the preferred choice for groceries shopping throughout the week and therefore make a point of offering low prices on all primary products: milk, butter, eggs, bread, juice, etc. Promotion does not often include short term price cuts for a few days or a week, instead they react swiftly upon learning that competitors have reduced their prices of primary products.

Against this background promotional sales with price reductions could be assumed to be greatest in countries such as France, Finland and to some extent Sweden with a fairly large number of hypermarkets and relatively few discount markets. Nonetheless, surveys show a somewhat different picture. In the Nordic countries promotion sales are more important to food sales than in France and Germany. Especially in Denmark the marketing pressure is high with many campaigns and advertisements in the weekly promotion papers, while the pressure in e.g. Finland is more in form of advertising in television and newspapers. This affects price comparisons and assessment of the competitive situation, cf. chapter 2.

Another factor is the differences in the range of products available in supermarkets in different countries. The differences are not as noticeable in the discount sector, thus some differences can be observed between soft discounters in different countries, whereas especially hard discounters with many private labels offer more or less the same narrow array of products within each product group in all the selected countries. The differences are more pronounced in supermarkets and hypermarkets.

4.4. Supermarkets' expenses and margins

The largest cost factors for supermarkets are – besides purchasing costs – labour costs and rent.

The rent depends on the location of the stores, whether they are located in town centres or out of town (perhaps in shopping centres), and whether they are found in metropolitan areas or in rural districts. Store networks are continually adjusted in line with living patterns, and according to which types of stores that prove most successful. At the same time, all countries have implemented legislation which regulates the location of shops and extensions of existing shops. This is mainly landuse- and planning regulation which lays down the framework for location of notably large shopping facilities and rules on opening hours. Rules on opening hours influence not only when customers shop, but also how.

Where shops are permitted to stay open on Sundays, households tend to do some of their shopping on that day and they become more mobile with respect to place of shopping. This benefits out-of-town centres. On the other hand, long opening hours and Sunday opening give increased labour costs.

Section 4.5 below is a review of how national regulation affects retailers in various countries in Europe. There is also information on national provisions on opening hours.

Food retailers and some distributors do not compete directly with comparable undertakings in other countries. Some of the major cost factors, including labour costs, are contingent on local and national conditions, such as collective agreements and public regulation. The same is the case within transport, although foreign carriers may be able to undertake some transport in competition with local operators.

The impact of labour costs on food prices has not been studied specifically. But various calculations suggest that labour costs do vary. However, the impact thereof on the level of food prices in the Nordic countries compared to the rest of the EU is difficult to assess.

Eurostat's labour cost figures for the service sector (2002) clearly show the differences in wages between the countries, cf. table 4.4. Denmark, Sweden and Belgium are among the countries with high wages whereas Iceland, for example, is below average. In addition to wages in the retail sector, the figures in the table also include wages in the wholesale sector and car repairs.⁵⁶

Table 4.4. Hourly wages in the service sector - (/hour)

Source: Eurostat. Labour cost

The data in table 4.4 include all direct labour costs in the service sector, i.e. also social security contributions.

In addition to wage rates and labour costs, different levels of productivity should be taken into account in comparisons. Data suggest that productivity varies from one country to another. Moreover interviews with retail organisations reveal that in Denmark the number of specially trained shop assistants is comparatively higher than in the other Nordic countries and Germany, in particular. Presumably, specially trained employees generate higher sales per employee. A number of jobs in a supermarket is very much the same in all countries, for example working at a cash terminal or the refilling of shelves, but table 4.5 confirms that sales per employee are higher in Denmark than in other countries.

Table 4.5. Sales and margins generated by supermarkets

Source: Eurostat
Note 1. Return/employee
Note 2. Average = figures for Denmark, Sweden, Norway, Germany and Netherlands.

Second, the labour cost share of sales varies depending on the type of shop. The labour costs of conventional supermarkets and hypermarkets are higher than the labour costs of discount markets, particularly hard discounters, cf. table 4.6 which is based on data from the retail trade. Large supermarkets and hypermarkets have more employees to fill shelves and perhaps provide personal service in the service sections with non-food products and shop-in-shop of the stores.

Table 4.6. Labour costs in retailing

Source: Interviews with retailers

Labour costs thus vary within a range of almost 10 per cent of sale depending on the type of shop and service. This means that the retail structure will impact greatly on the extent to which labour cost differences are reflected in price levels. There are significant differences among the grocery retail structures of the various countries, cf. section 4.2, and in the light of the percentages set out in table 4.6, it is evident that the impact on food prices of such differences are greater than labour costs.

In retailing labour costs amount to between a third and one half of total gross margins. According to our data, the gross margin of hard discounters may be as low as approximately 10 per cent of sales. Other supermarkets have higher margins, and for all supermarkets as a whole the gross margin is more than 20 per cent.

In comparisons of gross margins obtained by supermarkets in the Nordic countries with those of supermarkets in other EU countries, the higher wages in the Nordic countries are not reflected, cf. table 4.7 based on Eurostat data.

Table 4.7. Gross margins and sales of supermarkets

Note 1. Gross profit/turnover
Note 2. Average= Figures for Denmark, Sweden, Norway, Germany and Netherlands.
Source: Eurostat

The figures from Eurostat show that gross margins in the Nordic countries are not noticeably different from gross margins in Germany. This may be because the varying levels of productivity and shop types, in particular, equal out the wage differences.

The figures on gross margins in Europe in table 4.7 do not comprise all countries in EU15, and the figures must be interpreted with some caution. It should, for example, be noted that data from statistics authorities on retail margins do not make allowance for the degree of vertical integration. The activities of retailers, wholesalers, suppliers, etc. change continually. Producers and distributors are constantly customising their activities with a view to enhancing efficiency and such customisation affects the margins achieved by retailers and suppliers. One example is the customisation of distribution patterns. Retailers have rationalised stores function and are, for example, taking over the actual delivery to the stores from more and more distributors.

Another example is joint marketing, where suppliers pay in order to be included in retailers marketing.

There are considerable differences in the labour costs of supermarkets in the Nordic countries (notably Denmark, Sweden and Finland⁵⁷) and the rest of the EU. However, to some extent the impact on prices is equalled out by the differences in productivity and the different retail structures. According to Eurostat's statistics retail, gross margins and margins per employee are not higher in Denmark, Sweden and Norway than in the rest of the EU. This indicates that overall the higher labour costs are not reflected in prices. Though this conclusion is uncertain.

4.5. Public regulation

Public regulation in the European countries affects consumers and retailers in different ways. Land-use planning regulation affects the location of retailing, while other instruments of government can affect the operation of the business. Recent changes in this area have seen an easing of restrictions on opening hours but a tightening of land-use planning regulation and the rules governing retailing, such as price marking and display regulation, to safeguard consumer interests and regulate trading conditions.

Directive 98/6/EC provide the rules about prices of products offered to consumers. This Directive do not prevent Member States from adopting or maintaining provisions which are more favourable as regards consumer information and comparison of prices. These rules are implemented in the national legislation.

Denmark has a special Price Marking and Display Act⁵⁸, and so has Sweden. In Norway, the rules are incorporate into the Marketing Practice Act and the same in Finland.

Sweden

Opening hours are not regulated in Sweden. But retailers are responsible for reasonable working conditions. Authorities may close or restrict trading by retail shops on security grounds, typically in large cities in late hours. Generally, hypermarkets are open 7 days a week from 8-10 am until 7-10 pm. The regime in Sweden is less restrictive than the regimes in Denmark and Norway. Sunday trading began in the 1980s and is steadily growing in popularity, especially among the centres and hypermarkets.

In terms of planning policy, Sweden lies in stark contrast to its Scandinavian neighbours. A number of supermarkets have opened in recent years, which indicates that the regulations are fairly liberal compared to other Nordic countries. However, the planning process, in which the municipalities are the principal decision-makers, is generally considered one of the most difficult entry barriers contributing to the static market structure in Sweden. With the advent of hard discounters and a public debate on food prices, it seems that municipalities have become somewhat more tolerant towards new shop developments⁵⁹.

Norway

Since April 2003, opening hours in Norway have not been regulated, except on Sundays and official holidays. There are exceptions to this rule: Stores are permitted to stay open on the three Sundays before Christmas. Stores in designated tourist areas are permitted to stay open on Sundays, as are grocery stores smaller than 100 square metres and petrol stations smaller than 150 square metres.

The five-year moratorium on the building of new stores or shopping centres of more than 3,000 square metres, announced in 1999, has been replaced by new legislation leaving it up to the local authorities to decide which kind of development they want in their area. The aim still is to prevent the erosion of town and city centres by putting an end to new establishments in green-belt areas. However, if plans may have an appreciable impact on the competitive conditions, the planning authorities are obliged to make assessments of this.

Finland

Stores are permitted to stay open between 7 am and 9 pm from Monday to Friday and from 7 am to 6 pm on Saturdays. Sunday trading has been permitted since 2000, but only between 12 am and 9 pm and only in November and December and from June till August. Food shops smaller than 400 square metres are permitted to stay open every day except on public holidays.

As in many European countries, the focus of Finnish retail planning policy is to protect town centres by carefully controlling the amount of new out-of-town developments. One of the key aims of the new Land Use and Building Act, which came into force in January 2000, was to exert greater control over large-scale retail development, notably hypermarkets, in an area that was not regulated previously. The Act provides that commercial property of more than 2,000 square metres will only receive planning approval if the site is specially designated for such purpose in the local plan. Local authorities have power to make independent decisions in land-use planning matters. As in other Scandinavian countries, decision-making has been decentralised from national government to the municipalities and, as a consequence, retail development varies from location to location.

The current Land Use and Building Act is thought to slow down the construction of large retail stores significantly, but it is largely at the discretion of the municipal decision-makers to decide whether building projects ultimately proceed at an acceptable pace.

Denmark

Shops are permitted to stay open from 6 am on Monday to 5 pm on Saturday and they are not required to close at all between these times if they do not wish. Sunday trading is allowed from 10 am to 5 pm on 21 Sundays throughout the year. Small food and grocery stores with annual sales of less than € 3.4 million are permitted to stay open on all Sundays as are outlets at junctions as stations, airports and petrol stations. Denmark has had regulations concerning planning for new shops and their maximum size since 1997. Development of food stores in general should not exceed 3,000 square metres and large-scale retail planning in out-of-town centres is quite restrictive. This aims to protect city centre retailing and small dependent retailers, while it also prevents significant out-of-town development.

Opening of large outlets is not impossible, however, but special planning arguments must be provided.

A change in 2002 transferred enhanced planning authority from counties to municipalities. Recently, a committee has been appointed to evaluate the need for adjustment of the existing law.

The planning regime in Denmark has resulted in a limited number of hypermarkets and has benefited the discount sector which establishes shops with floor space below the permitted limit.

Iceland

Shops are allowed to stay open 24 hours a day, also on Saturdays and Sundays. Therefore there are many retail chains that emphasize long opening hours, usually from 9 or 10 am until 9 or 11 pm. Despite that shops are required to limit their opening hours on public holidays like, for example, Easter and Christmas.

Planning regulation in Iceland is from 1998. There are no provisions in the act directly governing trade or the use of stores. Instead, they are included in a regulation which contains provisions on both trade and service. Decision-making has been decentralised to the municipalities and as a consequence, retail development varies from location to location.

UK

There are no restrictions on trading hours during the week, but stores of more than 3,000 square feet are only permitted to stay open for 6 hours on Sundays. Many of the leading supermarket/hypermarket chains have stores that are open 24 hours a day.

Planning Policy Guidance (PPG) 6 restricts large-scale out-of-town development in favour of town centre regeneration and imposes a sequential test for development. In order to build out of town, it must be proved than no suitable site can be found centrally, and that there is a need for the scheme to go ahead. Similarly PPG 13 aims to control out-of-town development and directs new development to areas that will utilise more sustainable transport modes and reduce dependence on the private car. In addition, the government is trying to restrict the parking ratios for all new developments, encouraging planners to make shoppers and leisure users share parking provision and use greener forms of transport.

PPG was a result of a large growth in new retail floor space and shopping centre openings in the 1980s. The first half of the decade was characterised predominantly by town centre development, while the late 1980s was characterised by the growth in out-of-town shopping development, with a change in Britain's urban retail landscape. Out-of-town sites were relatively easy to assemble and the shopping centres were popular. But despite the trend some 75 per cent of total space opened during this period was in towns.

The UK thus had a very early development in the retail sector towards shopping centres with hypermarkets and UK grocery retailing is dominated by big retail chains. This has prevented the discount chains from capturing large shares of the retail market. UK retailing only claims a share of 5 per cent⁶⁰, which is far below other European markets.

Germany

Trading hours have become a serious issue in Germany where restrictions, traditionally, have been tighter than almost anywhere else in Europe. Trading is permitted from 6 am until 8 pm on weekdays and on Saturdays until 4 pm. Sunday opening is forbidden, except for convenience and travel goods shops.

The German retail planning system is restrictive with strong environmental concerns coming into play. Current legislation permits the construction of large-scale retail schemes, such as shopping centres, hypermarkets and factory outlets, only in core areas and special areas, and openings in special areas are conditional on the local town and country planning regulation being taken into account. In 1998, the law concerning construction and regional planning was revised, making the planning and development of large-scale retail schemes subject to the discretion of the regional planning authorities. Additionally, large-scale outlets have to undergo an environmental impact assessment, if their sales area exceeds 5,000 square metres. This means that floor space in Germany per inhabitant is less than in France and the UK, and this regulation has opened up opportunities for discounters.

Netherlands

Supermarkets may stay open from 6 am to 8 pm six days a week with Sunday opening permitted up to 12 days a year. In tourist cities shops are permitted to stay open every Sunday. Retailers may apply for special licences allowing them to stay open until 9 pm during the week. Municipal authorities have the last word on what is permitted in the local area.

Dutch geography means that many towns are located close together. This has heightened concerns about the impact of out-of-town retailing, resulting in the absence of the hyper-market concept. Until the early 1990s the focus of Dutch retail planning was on concentrating shops in a limited number of shopping districts within built-up areas. A change facilitated the development of concentrations of large-scale retail parks outside existing retail locations. However, this is only permitted in the thirteen largest population centres around the country. The restrictive regulation has resulted in the almost complete absence of hypermarkets.

France

Trading hours in France have become very flexible. The main limitation being the maximum number of hours that employees are permitted to work (46 hours for food outlets). Sunday opening is limited to tourist areas, convenience and service retailers. Shopping centres may stay open five Sundays a year.

In 1973, France was the first Western European country to introduce special legislation to control the development of retail space. Under this legislation retail developments with sales space of more than 1,500 square metres (or 1,000 square metres in towns with less than 40,000 inhabitants) were required to obtain planning permission from the Town Planning Directorate. The prime objective of this legislation was to protect the small retailers from the big distributors and hypermarket operators. In 1996 a more restrictive law was introduced requiring all retail units of more than 300 square metres to obtain a special authorisation. The restrictive legislation has not prevented the development of a large hypermarket sector in France accounting for 50 per cent of retail sales⁶¹. Rather, the effect of this legislation has been that retailers have been forced into mergers.

4.6. Conclusions

In all the Nordic countries, the number of retail shops has decreased considerably and the food retailing has shifted towards the supermarkets, which today accounts for approximately 80-90 per cent of retail sales of food products. Whereas overall changes more or less have been the same, the picture today is somewhat different when it comes to number of shops. The number of shops per capita throughout the Nordic countries is relatively high in comparison with other countries, such as Germany, the Netherlands and the UK. At the same time, the population density is lower, except in Denmark.

Within the supermarket sector, especially discount stores and hypermarkets have increased their market shares. Discount shops are characterized by low prices and a narrow assortment. Hypermarkets have larger assortment - both food and non-food products. Their market policy often includes numerous campaigns with price cuts. The large number of discount markets and hypermarkets and their mutual competition influence prices and the selection of food products significantly, and their progress contribute to explain the reduced price gap between the Nordic countries and EU-15.

The retail organisation in the Nordic countries have become more concentrated, organised in marketing chains and buying groups. The Nordic retail sector is clearly more concentrated than it is in for example France, Germany and the UK.

This concentration has entailed a change in the balance of market power. Powerful buyers can negotiate low prices paving the way for lower consumers prices. If competition is strong at the retail level most of price rebates and bonuses granted to the retail chains will be competed away to benefit of the consumers. However if exercise of buyer power restricts the number of substitutable products in the shelves, there is a risk to diversity. This risk is enhanced if suppliers are foreclosed from the market, leading to increased supply side concentration in the long run.

High market concentration in the retail market may have weakened the competition between the market participants. If competition becomes weaker then lower prices from suppliers to a less degree is passed over to the consumers compared to a situation with more fierce competition. Moreover, some of the retail markets in the Nordic countries exhibit some characteristics that are compatible with a stable tacit collusion; They are concentrated and there are fiercer competition. Prices are volatile but the increased collecting of data about prices and sale makes it easy to react swiftly to any price initiative. It is therefore vital for competition authorities to preserve the competitive pressure at the retail level and lowering barriers to entry.

Wage cost - at the retail level - are higher in the Nordic countries than in many other European countries. But this is not fully reflected in higher retail margin on the average. This can be explained – at least partly – by differences in productivity and in the retail structure.

Purchasing patterns are still largely national, but with a process of internationalisation similar to the suppliers. Cross-border operations, new ideas from other countries and cooperation with supermarkets in other countries have become more common and are growing in importance. Lidl's entry on the Nordic markets is an example of the increased internationalisation.

Assortment and marketing still vary from one country to another and only a small amount of food products are the same in the Nordic countries. However there are no reason to presume that the difference between the Nordic countries are larger than between other EU countries.

Public regulation in the European countries affects retailers in different ways. Land-use planning regulation affects the location of retailing, while other instruments of government can affect the operation of the business. The zoning regulation has affected the pattern of establishing discount-shops, hypermarkets and out of town centres differently. Recent changes in this area have seen an easing of restrictions on opening hours but in some countries land-use planning regulation and the rules governing retailing, such as price marking and display regulation, to safeguard consumer interests and regulate trading conditions have been tightened.

Fodnoter

43 Supermarkets here includes all shops with a complete assortment of food.

44 Source: European Retail Handbook 2002/03

45 Norway excl. kiosks.

46 Source: National Statistic and ACNielsen.

47 Several mergers have been investigated carefully by the national Competition Authorities. The Finnish merger between SOK and Spar Finland has been released and will be investigated.

48 Netto is considered a hard discounter in Sweden

49 Change in prices on a selected basket of goods.

50 Source: Konkurrensverkets rapportserie 2004:2. Konsumenterna, matpriserna och konkurrensen.

51 Source: DLF Conference 2005 (Peter Bo Rützou, Kavli).

52 All sales figures are exclusive of tax.

53 Source: Interview with the chains.

54 Source: Interviews with retailers.

55 However, the products may not be the same in different countries. For example, Norwegian shops do not sell wine, and it is forbidden to use beer to attract customers in this way.

56 Data from the retail trade indicate that wages for the same type of work in the shops are higher in the Nordic countries than in countries such as Germany and the UK. The differences may be as high as 15-20% or more.

57 Norway is not included in the data available from Eurostat.

58 A new proposal is being prepared

59 Konkurrensverket has in ”Konsumenterna, matpriserna og konkurrensen”, 2004, proposed five reforms which would facilitate entry of food retailers.

60 Source: Euromonitor International 2003. A future for Discounting 2003.

61 Source: Bain & Company Press Release 6/17/2004.

Version 1.0 December 2005 • © Danish Competition Authority.
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