European retail: Mercadona leading with cheapest private label
Published:20-March-2009
By Datamonitor staff writer
Mercadona, Spain's leading grocery chain, reported strong sales growth in 2008, although price reductions dented the company's profit. By focusing on private label and removing unprofitable lines from its stores, Mercadona has managed to control costs and pass on price cuts to consumers. Consequently, a price war has erupted between Spain's grocers, each vying for diminishing retail spend.
Spanish grocer Mercadona recorded a net profit of E320 million in 2008, a 5% fall on the previous year. This hit to profits was a result of price cuts, denting the retailer's margins. Despite the company's net profit taking a slide, sales were up 10% to E15.4 billion, with the company enjoying greater footfall from cash-strapped Spaniards seeking out its in-store bargains.
The company noticed a significant slump in demand in the latter half of 2008 as the economic crisis kicked in. Furthermore, its grocery sales were particularly affected by a national transport strike, which disrupted deliveries to stores for an extended period.
Despite this challenging environment, Mercadona's price reductions helped boost turnover by 10% in 2008. The company is well positioned to weather Spain's economic woes as its focus on low cost particularly appeals to price conscious consumers. Indeed, Mercadona has effectively established its value priced 'Hacendado' range as Spain's cheapest private label offer.
Though sales of its private label continue to grow strongly, Mercadona has recently come under fire from customers and suppliers after it limited the number of branded goods in its stores, as part of a cost saving exercise. Towards the end of 2008, the company reduced the number of product lines in its stores by 8%. While the reduction stripped out the least profitable ranges including some of the company's private label lines, the focus of criticism has been on the removal of branded goods, which some customers feel is limiting their choice and pushing them to buy Mercadona's private label.
However, by limiting the number of product lines in its stores, the grocer has been able to lower costs and pass on the benefits to customers through price reductions. With price currently the overriding factor for most consumers' purchase decisions, Mercadona's strategy is strengthening its low price proposition and making it more competitive with discount chains such as Dia and Lidl.
Mercadona has been lowering its prices since October 2008, which has initiated a price war with rivals, most notably Carrefour. The French grocer has responded with its own price cuts at its Spanish operations, and has now revealed plans to slash its prices by up to 25%. The price war between Spain's grocery giants is likely to intensify in the year ahead as they battle it out for a diminishing retail spend, with each one projecting itself as the cheapest in the market.
