French retailer Auchan’s hypermarket managing director for its home market, Vincent Mignot, has called a freeze on all investments and store expansion to fund a major price-cutting campaign.
The grocer has also asked store managers to come up with ideas for potential savings and feed them back to headquarters.
The initiative comes as Auchan becomes ensnared in a large-scale price-cutting war with rivals such as Carrefour, Leclerc and Casino’s Géant hypermarkets, who have all been investing in significant price reduction programmes. Competition is fierce in the French grocery market – more so now than ever before.
The strategy of reducing capital expenditure to fund price reductions has been used before. In the UK Tesco, for example, has reduced capex substantially this financial year– arguably to fund price cuts on everyday items.
The balance between capital investment in expansion and refurbishments and investment in price reductions is one retailers must get right. Lack of capex will result in a tired store estate and the retailer potentially missing out on lucrative long-term expansion opportunities. Meanwhile, a lack of investment in price, particularly for a mass-market player such as Auchan, would result in shoppers switching to rivals. A big conundrum indeed.
In the current climate however, it appears retailers are choosing the former – big price investments – in France even more than is the case in the UK. This investment is largely driven by macro-economic factors such as a stalling economic recovery, which is leading consumers to be more cautious with their finances. This race to the bottom is leading large French players to launch discount zones in their stores. Auchan and Carrefour are good examples. In these zones low-priced products, which can include economy own-brand or ‘no-name products’, are grouped together.
Price investment aside, the freezing of expansion of hypermarket formats could suggest the format is long past its sell-by date. Quite the contrary - the hypermarket and superstore channel remains France’s largest grocery channel, generating sales of almost €100bn (£81bn) in 2013.
Yes, expansion will naturally slow with the shift towards ecommerce and smaller convenience formats, but this does not mean the format is dead. The hypermarket concept is one of France’s most profitable, having none of the costs associated with grocery home delivery and often being located on cheaper sites in suburban or out-of-town areas. The format will need to evolve to meet changing consumer needs, but this is already underway in France. Auchan, for example, is among the French players working to better localise its hypermarkets by giving greater autonomy to store managers. That management structure will enable a more localised assortment and customer service strategy.
While the format is likely to experience a period of change, it will continue to be one of France’s largest and most important. Aggressive price investment will also continue while the market remains challenged.
David Gray is a retail analyst at Planet Retail