By Denise Klug, Associate Analyst, Planet Retail

Highlights

• Jump up the ranking is not so amazing
• Synergies will improve profitability
• Holding position will be a challenge

Implications

• Instead of pushing expansion, Ahold focused on the performance of its existing network for several years. As a result, it has become an expert in improving efficiency and saving costs at its Czech stores. This can help increase margins at the SPAR operations.
• Ahold would have become larger than Tesco in terms of sales anyway, but Tesco is better established in the Czech Republic and will challenge the retailer in the future. * Rewe Group is likely to catch up with Ahold as it has always regarded the country as one of its key markets. It will benefit from the fact it operates a freshly modernized discount store network as this format is booming in the region.
• Ahold will find it difficult to compete on price in some product categories with competitors that have established themselves in CEE and will be increasingly using global sourcing strategies to purchase goods in the CEE region.
• The Czech Republic is a highly competitive retail arena which grocery retailer Ahold describes as “mature”, but this has not prevented it striving for market leadership. The planned acquisition of SPAR (Austria)’s operation catapults the Dutch company up the rankings to become the second-largest Czech player by sales – but not for long.

Ahold announced an agreement to buy the SPAR (Austria) Czech Republic business for an enterprise value of CZK5.25 billion (USD262 million). The deal comprises 100% of shares of SPAR CZ and a related real estate entity owning four stores. The acquisition is to be funded from existing Ahold cash resources and is subject to the usual regulatory clearance. Ahold expects the process to close after the summer.

The takeover came as something of a surprise. However, when Ahold revealed last November it was finally selling its loss-making 24-store operation in Slovakia, it allowed it to fully concentrate on its Czech business. Whereas previously management had its hands full dealing with the troubles in Slovakia, now it was free to devote 100% of its time on the Czech Republic.

Despite fierce competition, Ahold has maintained a relatively strong market position in the Czech Republic, but most investments have been in its existing network, such as downsizing its hypermarkets. Expansion as a concept seemed to have been forgotten in recent years. However, with this forthcoming acquisition, Ahold can substantially grow its footprint in the market, and obtain additional coverage in premium locations like Prague and Brno.

The 50 Czech SPAR stores comprise 36 compact hypermarkets and 14 supermarkets, all of which are companyowned. In 2013, the operation posted net sales of CZK12 billion (USD614 million). The acquisition, said Ahold, was in line with its stated strategy to develop its geographic reach in both existing and adjacent markets, with particular focus on market- leading positions.

The Dutch grocer currently operates 284 Albert supermarkets and compact hypermarkets in the country. Following the acquisition, the company will have over 330 stores.

Jump up the ranking is not so amazing >>

As Ahold proudly announced, absorbing the SPAR network will make it the number two player in the Czech Republic by sales, slotting in beneath Schwarz Group with its Lidl and Kaufland banners. This moves it up from its present position in fourth and means Ahold will overtake Tesco and Rewe Group.

But what might seem an impressive feat at first loses some of its luster on closer inspection. Ahold has been hot on the heels of Tesco for a while now. Even without the SPAR purchase, it was only a question of time until the Dutch company would have overtaken the UK giant. Tesco has shown poor performance throughout CEE for at least the past 12-18 months and is cutting back its investments in markets like the Czech Republic.

However, this does not mean Tesco is entirely a busted flush as there is the possibility it might recommence funding its CEE operations from 2015 and is still pushing its e-commerce operations in the region. Tesco has a solid foundation to build upon of a multi-channel portfolio including e-commerce and shopper data accrued from its renowned loyalty scheme.

Rewe Group regards the country as one of its key markets. It is also its best-performing operation in Central & Eastern Europe. Several major acquisitions have contributed to Rewe’s current position, so Ahold’s move will come as no surprise. It also goes without saying that Rewe Group will be keeping a close eye on Ahold and is unlikely to be content with its demotion in the market. Rewe Group is currently looking to benefit from its freshly modernized network of Billa supermarkets and Penny discount stores. The latter format, in particular, is booming in the region.

Spar Czech Republic >>

Ahold is to acquire 50 SPAR outlets in the Czech Republic. The stores will be rebannered to its Albert formats.

Following the SPAR takeover, Ahold will be only slightly ahead of Rewe. It will take second spot – but will likely be merely keeping the seat warm for Rewe. It seems inevitable that the German group will elbow Ahold off its perch sooner or later. Meanwhile, Schwarz Group’s leading position remains beyond the reach of all competitors.

Synergies will improve profitability >>

Not only is competition intense in the Czech Republic, the business Ahold is about to take on is not exactly in the best financial shape. SPAR CZ is currently operating at a loss in a cutthroat market that takes few prisoners. SPAR (Austria) has admitted it is quitting, as it could not see itself realizing a satisfactory market position. It replaced its Czech management last year, but this did nothing to change its fortunes.

This does not discourage Ahold, which managed to lift operating income by 14.8% in FY 2013 with net sales slipping 1.5%. Instead, it sees opportunities for cost savings at SPAR CZ. Margins in the Czech Republic are low, but Ahold has become expert in trimming operating expenses, having implemented performance improvements across its existing Czech store network for several years now.

Ahold Albert in Czech Republic >>

Albert currently operates 284 supermarkets and compact hypermarkets in the country. Following the acquisition, the network will comprise over 330 stores.

Ahold CEO Dick Boer stated that SPAR’s losses are due to it lacking scale and not operating efficiently enough in a highly competitive environment. The Dutch grocer is of the opinion it will be able to enhance the SPAR network’s margin within the next two years. Ahold forecasts annual synergies to reach EUR20 million (USD28 million), leveraging the existing Albert infrastructure, logistics and sourcing synergies.

Holding position will be a challenge >>

Despite the size Ahold will achieve with the acquisition of SPAR CZ, it will be a struggle to maintain its market position in the long term. The Czech Republic is the only country in CEE where Ahold operates. As such, it will have difficulty competing on price in some product categories with rivals like Tesco and Schwarz Group. These retailers are firmly established in Central & Eastern Europe and will increasingly be using global sourcing strategies to purchase goods in the region. And this lack of regional presence could prove to be Ahold’s Achilles Heel. For while Ahold may now be bigger in the Czech Republic, it does not necessarily follow that it is better.