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Retailing, continental style

Mohan Murti

The European market is now at the crossroads. Technology adoption is essential for the biggest companies in retail to remain competitive. Empowered consumers, decreasing workforce productivity and competitive and saturated markets are obstacles. Retail firms have reaped significant productivity gains by relying on scale and scope, with massive centralised chains.

Last weekend, I drove to Rheinberg, 40 km north of Düsseldorf, in Germany, where I got a preview of the global retail experience, circa 2013, at Metro's prototype `Extra Future Store.' Pickled peppercorns, distinctive and unusual in flavour, are a traditional favourite of mine. I fed my request into the touch screen console on my shopping cart, and up popped a map showing me the fastest way to get to the pickles section.

I went over and grabbed a bottle and put it into the cart. The pickle bottle carries a computer chip that talks to a 2-millimeter-thin pad lining the shelf. When I picked up the bottle, sensors in the pad notified the store database that the bottle had been removed. Meanwhile, I decided to exchange the plain pickles for the "mit Salz und Kreuter" (with salt and herbs).

My behaviour would have produced a flood of data back at Kraft Foods headquarters. The company, which gets this information in return for subsidising the smart shelf and the microchips attached to the packages, will use the data to analyse my behaviour. The marketing department will draw some kind of a conclusion from my indecision. For sure, they will also have an insight into my personal shopping habits.

Over 50,000 people have visited the Future Store in the last few years. The visitors come from all over the world. The star of the show is the radio frequency identification (RFID) chip — a piece of circuitry about the size of a grain of sand.

Thanks to the coordinated efforts of the world's biggest retailers and manufacturers, these little tags are about to infiltrate the world of retailing, in Europe.

Drifts and trends

Here are some drifts and trends I see in the European retail sector.

Convenience stores are among the fastest growing retail formats in Germany and the rest of Europe. The more-than-80,000 convenience stores can be broken down into four types: Gas stations, train stations, kiosks, and bakeries. The last provides many snack foods and other food and beverage items in addition to breads, pastries and sandwiches that makes Germans the European champions in bread consumption with a per capita consumption of more than 250 kilos annually!

Grocery retailing: In addition to the roughly 25,000 discount stores, supermarkets, and hypermarkets, there are more than 50,000 small and medium-sized grocery stores. Discounters have conquered the German retail market with their unique outlets and aggressive pricing strategy. They serve consumer demands, particularly within grocery retailing. Their share of the revenues is only 14 per cent of the market.

Competition: About 10 large retailers account for 80 per cent of the turnover in foods and beverages. Among them are Rewe, Aldi, Edeka, Tengelmann, and the German-Swiss enterprise, Metro. Each of these leading retail groups has a unique business structure as well as purchasing and distribution system.

As for the big names in retailing, Tesco is now number two in Europe. The UK grocer has overtaken the previous number two in Europe, Intermarché. The French grocery giant, Carrefour, continues to be the largest retailer in Europe.

The European retail trends show how the dynamic businesses such as Carrefour, Tesco, Auchan, Sainsbury and Ahold are growing and will lead European retailing forward. They control the entire retail chain — from supplier to customer.

Clothing retailers: In clothing, Marks & Spencer (M&S) has overtaken C&A as the number one clothing retailer in Europe, despite the announcement that it would be closing its mainland European stores. M&S and C&A have suffered in recent times, losing market share to smaller, more nimble clothing specialists which are better able to adapt to changing fashions on the high street in terms of product and in-store environment.

Embarrasing flop: Wal-Mart, a worldwide phenomenon, has been an embarrassing flop, in Germany. All its 85 stores were sold to Metro Group, its German competitor which will replace the American stores with hypermarkets run by a Metro subsidiary called `Real.' Germany is the third-biggest market for retail goods in the world, after the US and Japan. But Wal-Mart could not find a foothold in Germany.

The American-style workers who smile at people entering the stores or pack items into shopping bags at the register — something Germans are used to doing themselves — were not fully welcomed.

The success of Tesco: Tesco has expanded its empire by staying in tune with its customers and successfully implementing changes that have forced its followers to copy or get left behind. Recently, expansion to other parts of Europe has progressed so much that Tesco now has more stores outside than inside the UK.

Culture and values: An important aspect of European retailing is understanding culture and habits. For instance, in Germany and most of Europe, society places value on the well-being of the whole community. Unlike in the US, European governments, along with churches, unions, and other organisations, take an active role in creating a lifestyle that allows time for family and non-commercial activities, including religion and hobbies, contemplation, and general relaxation, known as freizeit und erholung.

Since the 1950s, shopping hours in Germany have been among the most restricted in Europe. Germany's draconian law governing retailing hours, das Ladenschlussgesetz, ensured that stores remained closed after 8 pm on weekdays, and after 6 pm on Saturday, and altogether on Sunday, with the exception of outlets such as gas station and train station shops. Politicians and union representatives consider working on Sunday inappropriate for a civilised society. The values embedded in Germany's social market economy finds much support among the people, the government, and the unions; this ensures employee protection and a high quality of life.

Technology in retailing: The European market is now at the crossroads. Technology adoption is absolutely essential for the biggest companies in retail to remain competitive. Empowered consumers, decreasing workforce productivity and competitive and saturated markets are obstacles. Retail firms have reaped significant productivity gains by relying on scale and scope, with massive centralised chains and large size stores growing rapidly.

RFID in retail: Retailers such as Metro in Germany and Carrefour in France are convinced now that tagging incoming pallets and cases substantially reduces costs and improves service to customers. They have mandated that their suppliers fit them on all products.

In parallel with this, many European suppliers are now fitting RFID to incoming components at their factories and outgoing multi-packs and so on to improve manufacturing and logistics efficiency and food traceability. Metro's Future Store is the foremost live testing ground for RFID tags, and now the world's biggest consumer goods manufacturers are lining up to follow suit. Gillette, Kraft, and Procter & Gamble are among the companies banking on RFID chips to track each razor blade, cream-cheese container and bottle of shampoo.

They know precisely which package occupies what bit of shelf space and how long it takes the Future Store staff to replace a purchased item.

Retailing is awe-inspiring in Europe, and while RFID tags could constitute the best thing to happen to Europeans since the cog, it could be the biggest threat to their personal privacy since the crowbar!

(The author is former Europe Director, CII, and lives in Cologne, Germany. Feedback may be sent to mohan.murti@t-online.de)

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