Sometimes, even discount stores are nothing to be afraid of

Thursday, 02 May, 2019 Food From Poland 35/2019
It is an unquestionable fact that the development of discount stores has saved the Polish FMCG trade. Without them, it would be like in Hungary and the Czech Republic.
If organizers of the first franchise food trade chains in Poland were told twenty-five years ago that this organizational form will account for as much as 60% of all convenience retail outlets active on the Polish market at the end of the 2010s, they would surely never have believed it. The nature of the first franchise chains, established before 1995, was more similar to purchasing groups than to trade chains in the modern sense. The main goal of establishing such groups or associations was to provide the participants with better conditions of purchase from manufacturers and suppliers, rather than ensuring the competitiveness of their retail outlets through uniform store decoration, reduction of an outlet’s running costs through provision of less expensive trade-related services, or even financial support to a franchisee.

Let us now give a brief explanation of what a franchise is anyway. Encyclopedias define it as a system of the sale of goods or services, based on close and continuous cooperation between separate and independent enterprises: a franchiser and its individual franchisees. A franchise also assumes transfer of know-how from the franchiser to the franchisee throughout the duration of a franchise agreement, as well as transfer of at least some products offered by the chain, the prices of which are to be negotiated by the franchiser. The essence of the system is also the fact that the franchiser grants its individual franchisees with a right and charges them with the responsibility to conduct business in accordance with the franchiser’s concept. Within the framework of a written agreement and in exchange for direct or indirect financial benefits, this financial power authorizes an individual franchisee to use the franchiser’s trade name, trademark or service mark, methods of conducting business, technical expertise, systems of procedure, as well as other intellectual or industrial property rights, and to benefit from permanent commercial or technical assistance from the franchiser.
This is what definitions say. However, how does it translate to the functioning of a grocery store?

Difficult beginnings

In the early 1990s, the first chain organizers probably did not exactly know that themselves. The first franchise chains were created, as I have mentioned above, on the basis of purchasing groups organized several years before and, frankly speaking, they did not differ much. There were a lot of smaller or larger purchasing groups at the time, and one of the best known ones, associating a considerable number of outlets, was the Lider chain which has however failed to stand the test of time. Although purchasing groups are trying to rebuild themselves currently, they are having difficulties doing so, since they prove unable to keep up with the competition on the part of franchises. Therefore, most purchasing groups of that time have not survived until this day, just like most of the fledgling franchise chains 25 years ago. The only significant franchise entity created in that period has been the Lewiatan Polish Trade Chain, established by merchant organizations in 1994. Almost from the onset, this chain had a unique organizational form. Over a dozen regional companies were created to serve as chain organizers in the given area, and they became companies owned by the Lewiatan Holding. Despite territorial differences, this allowed the chain to maintain its large scale and largely uniform shape. Of course, the structure of these companies and the scope of their operation would change over the years. Some merchants refrained from participation in the chain, others established their own franchising company, organizing the eLDe chain under the LD Holding name, which no longer exists now. Moreover, a quarter of a century is long enough for individual regional companies and a holding company to undergo various trials. Shares in some of them were overtaken by one of the largest wholesale FMCG distributors at the time – the Emperia Group. Later, when Emperia’s wholesale operations and franchise chains were acquired by Eurocash, Lewiatan became a part of the largest wholesaler on the Polish market. Both due to support from large wholesale entities and to the skills of chain organizers, Lewiatan has maintained its identity and developed successively over the years. Admittedly, its development was much slower than in the beginning of its operation, since it has approx. 3,200 stores today, while it used to have less than 3,000 as late as 15 years ago. However, it is hard to wonder, given the fact that the franchising offer is much richer today than in the first decade of the century and new chain participants are not as easy to attract as they used to be.

In view of a foreign threat

The second half of the 1990s was a special period in the history of the entire Polish trade, and of franchise chains in particular. That was a time when the first large foreign trade operators entered the Polish market with their hypermarkets, supermarkets and discount stores. Over a couple of years, they gained almost 40% of the Polish retail FMCG sale market. Also in this case, domestic retailers, traditionalist in their majority, proved able to organize so well that they largely maintained their competitiveness on a market where the expansivity of international entities was becoming increasingly dangerous. As the turn of the millennium saw franchise chains springing up like mushrooms, it was possible to preserve the structure of Polish trade that can be envied by the neighbouring countries. In the Czech Republic, Slovakia or Hungary, almost 80% of the market has been dominated by foreign business leaders over a short period of time. In Poland, on the other hand, it was possible to keep 60% of the market in the hands of traditional trade in the initial period of foreign expansion, while this percentage can be estimated at above 40% now. And all of that is largely due to franchise.

In those breakthrough years, such chains emerged as Delikatesy Centrum with wholesale background in Krosno; PSH Nasz Sklep, organized by the Specjał wholesaler; Groszek, managed by Emperia; Rabat Detal, established by retailers alone; Sklep Polski of the Gniezno wholesaler; Chata Polska with a background in the form of the Marol wholesaler; or the abc chain, organized by Eurocash from the very beginning. Moreover, tens of smaller, regional franchise chains, such as Hitpol and Sezamek in Subcarpathia and Lesser Poland, Poziomka in the Radom region, or the Top Market Chain established by the Warsaw Supermarket Group, which has already become nationwide today. This franchise boom allowed Polish retailers to keep a really large portion of the domestic FMCG trade market in their own hands. Even if operators of these chains have been changing, even replaced by those not always perceived as Polish, this does not change the fact that domestic merchants remain their members, and therefore, these chains still remain supportive to the Polish trade, allowing it to compete successfully against foreign competitors; currently, above all, against discount chains.

An increasingly wider choice

As a result of the processes described above, the Polish market currently features several dozen operators of franchise chains under which much more than 40,000 FMCG stores are organized. Exact data is difficult to give, since there are a number of local chains, only associating several or several dozen stores each, which are frequently omitted from any statistics, prepared either by the Central Statistical Office of Poland (GUS) or by research centres. Obviously, the largest franchise chain operator is Eurocash, managing, both directly and through subsidiary franchise companies, chains totalling more than 15,000 stores. They form such chains as abc, Lewiatan, Groszek, Euro Sklep, as well as Delikatesy Centrum, Eurocash’s original franchise purchase many years ago. The number of stores operating under franchise companies of the second largest wholesaler in terms of the scale of operation, i.e. the Specjał Group, is already close to 8,000. Under such companies as Nasz Sklep, PSH Livio, or Rabat Detal in which Specjał acquired the controlling interest last year with Nasz Sklep, Delikatesy Premium, Delikatesy Sezam, Livio, and Rabat. Therefore, only two organizations associate more than a half of all franchise outlets. The largest chains include Eden with 1,200 stores and the Chorten Group that will soon hit 1,500 stores. Mirabelka from Masovia has less than 500 stores, while PGS, i.e. Top Market, owns almost 700. A similar number characterizes group chains (including Piotruś Pan, Poziomka, Bonus, or Dobry Sklep) and single stores associated under the Kropka chain. Delko is becoming an increasingly significant operator. This household chemical and cosmetics distributor, after the acquisitions it is currently performing (including the Słoneczko and Avita chains), will have more than 800 outlets in its portfolio. Smaller chains of regional nature include Chata Polska, the aforementioned hitpo and Sezamek, Pokus, Rosa, Witaj, Malinka, Cezar, To Tu, Topaz, Pionier, Sami Swoi. If we include Żabka, positioning itself for several years as a franchise chain rather than a partnership one, as it used to before, then probably as much as 60% of convenience stores on the Polish market operate under a franchise structure. It is worth keeping in mind that the share of franchise outlets is much greater among specialist chains, such as meats or bakery. This is due to the fact that producers, when establishing their company store chains, seldom decide to build a proprietary chain – after all, retail trade is not their domain.

Speaking of franchise on the Polish retail market, it is also worth remembering that the franchise formula has sparked the interest of great international trade companies operating in Poland. For several years, Carrefour has been building its own franchise chain. Under the Carrefour Express brand, Carrefour Market and the French company Globi has organized a chain that already includes more than 600 outlets today. The Odido chain, managed by Makro Cash&Carry, is among the largest franchise chains in Poland. Although its quantitative development has been virtually brought to a halt in recent years, this does not change the fact that approx. 2,000 stores operate under the Odido brand. Such chains as Intermarché or E. Leclerc have a franchise nature as well. The former is getting close to the number of 400 stores, while the latter, specialized, after all, in hypermarkets, has approx. 40 outlets, 16 of which are among the largest ones. Jeronimo Martins Polska, the operator of Biedronka, however reluctant it might be to admit it, also owns several dozen stores of franchise nature. Several years ago, on the other hand, development through franchise was announced by Simple Market supermarkets owned by Auchan. However, changes in the chain’s image and transformation thereof into Auchan Supermarket outlets seem to have caused such plans to be maybe not necessarily shelved but surely postponed. Currently, it is hard to say what the future will be of these plans.

Choice of a retailer

Until recently, most franchise operators aimed at so-called franchise hardening. This meant, on the one hand, a stronger bond between stores and a franchiser, i.e. an obligation to use the franchiser’s trade and marketing offer, and on the other hand, providing a retailer with more favourable trade conditions and more support from the operator, and sometimes even significantly higher payments on retro received from producers. The Delikatesy Centrum chain became a peculiar model for building a hard franchise at that time, as management and supply of the stores as well as marketing operations had been, in fact, delegated to the chain’s central office. Many retailers are satisfied with such conditions relieving them from a number of burdensome obligations, facilitating operation of a retail outlet and ensuring a fair level of profits.

Currently, the hard franchise topic has lost some significance. This might be due to the rapid development of soft-franchise chains, proving that retailers, to a large extent, wish to maintain a wide margin of independence. Such chains as the Chorten Group or Eden, or even Specjał-controlled Nasz Sklep, have proven that soft franchise is doing well and there is no point imposing one’s own vision or future on store owners, since the quantitative development of a chain may be inhibited. Currently, operators rather tend to focus on offering different franchise forms to retailers under one chain. This is, for instance, the way of Livio and Nasz Sklep companies: when joining them, a retailer may choose the franchise form they would like to implement under the chain.

The franchise-hardening process is perceived slightly differently by chains unrelated to large wholesale operators, such as the Polish Supermarket Group or the Top Market chain. Here, one should rather speak of the chain-ordering process, i.e. ordering the principles of cooperation and sale. In view of the shrinking number of retail outlets on the market, it is becoming increasingly difficult to maintain the stores’ loyalty to chains. The ordering process is intended to ensure the elimination of errors and tightening of cooperation; consequently, retailer competitors have more difficulties than the chains within which they currently operate.

A richer offer

Modern franchise networks are not just about common purchase, shop sign, store design, marketing undertakings and retro payments anymore. They also involve a range of operations aimed at reducing the running costs of retail outlets as well as genuine support to chain participants. An increasing number of operators also offer less expensive store equipment acquisition, purchase of important trade-related items, such as cheap mobile phones, Internet access or insurance, as well as support in the acquisition of necessary financial resources to build, expand or renovate a store. Not to mention regular integration events which are not unimportant after all, especially as they take place at such interesting locations as Seychelles or Bermuda. Most chain operators with a large wholesale background also offer private label products to retailers, usually at prices competitive with those known from Biedronka or Lidl. Year by year, the support by chain organizers to chain participants is becoming increasingly wider.

The number of retail outlets operating under franchise chains should be expected to rise markedly in the years to come, mainly due to the organic development of the chains and the growing number of outlets not entirely successful in competing against discount chains. At the same time, one should expect consolidation processes within the existing franchise chains. As mentioned above, more than a half of all stores associated under franchise chains today are organized by two operators: Eurocash and Specjał. Moreover, consolidation activities are helped by the fact that such measures take place with negligible interference by the Office of Competitor and Consumer Protection, since they do not upset the market balance, resulting only in change of shop signs by retailers who remain independent. This was the case, for instance, with the purchase of the controlling interest in the Rabat Detal by Specjał.

Witold Nartowski

tagi: FMCG trade,