Hypermarkets May Be Losing Their Appeal for European Consumers

Since they appeared in continental Europe in the early 1970s, hypermarkets have turned retailing's competitive structure upside down, prompting an overhaul of marketing, sales techniques, and retail logistics, and revolutionizing consumer goods manufacturing. But signs have emerged that the format is weakening. A study of hypermarket evolution from 1991 to 1995 found that declines in the rate of consumption, government regulation, and demographic changes are starting to take their toll. More alarming for their operators, the study also found that hypermarkets appear to be losing their appeal for consumers, while other, newer retail formats are gaining momentum. The first hypermarkets opened in France, and the format has since spread to other European countries, South America, and Asia. A hypermarket looks like a grocery store that has expanded to 10,000 square meters of sales space and 60,000 products. But the resemblance stops there. First, hypermarkets are located outside city centers. Second, they offer many products besides food: houseware, car accessories, and gardening supplies, for example. With their broad ranges, large sales floors, and aggressive pricing, they have won over consumers, helped to alter entrenched shopping habits, and created wealth for shareholders. Hypermarkets' success formula is in question Hypermarkets appear to be as strong as ever. A steady stream of new stores is opening, international expansion is under way, and traditional formats such as family-run stores continue to be displaced. Hypermarket owners have been accumulating cash and have shown they can pay high prices to buy competitors. Pressure on suppliers, moreover, has helped maintain and even improve return on sales: between 1991 and 1995, hypermarkets in France and Spain added 3 percentage points to a typical gross margin of 18 percent. Returns to shareholders remain high compared with those from other retail formats and in other industries. But analysis of three important underlying indicators reveals growing pressure on hypermarkets' economic formula. First, it may no longer be possible for them to increase market share without making acquisitions. Up to 1996, hypermarkets continued to open at a rate of 35 to 40 a year in France and 20 in Spain, despite a nominally restrictive regulatory environment. Since then, internally generated growth in market share has slowed drastically. Market share gains in food declined in France from 2.9 percent a year in 1989 to 0.6 percent in 1995 [ILLUSTRATION FOR EXHIBIT 1 OMITTED] In Spain, share gains have stalled in the past three years, although hypermarket penetration - at 26 percent in 1995 - was much lower than the 48 percent recorded in France [ILLUSTRATION FOR EXHIBIT 2 OMITTED]. This suggests that saturation levels may differ by country. Second, productivity has dropped sharply. Sales per square meter, adjusted for inflation, have fallen since 1991, both in food (by 8 percent in France and 33 percent in Spain) and in non-food categories (by 14 percent and 6 percent respectively). This retrenchment is in sharp contrast with the ability to maintain or improve productivity demonstrated by competing formats such as discounters, category killers (large stores that specialize in, for example, toys or sports goods), specialty retailers with chains of stores focusing on specific categories such as fashion, and even large supermarkets [ILLUSTRATION FOR EXHIBIT 3 OMITTED]. Third, hypermarkets are seeing lower returns on ever greater and more expensive assets. To begin with, regulation and retail outlet saturation have made opening new stores increasingly costly, with the cost of fixed assets per square meter rising by 6 percent a year in France and 8 percent a year in Spain. In addition, rising operating costs and productivity losses have partially offset margin gains from squeezing suppliers. The higher investment required and limited growth in returns have combined to produce startling declines in returns on retail assets of 12 percent in France and 46 percent in Spain between 1993 and 1995 [ILLUSTRATION FOR EXHIBIT 4 OMITTED]. …