Tesco’s loss-making operation in Poland has been a drag on the retailer’s profitability in central Europe. Tesco Poland has managed to turn around its profitability via its three-year transformation programme, which has helped boost regional profit in 2018. Tesco has done this by reorganising its logistical and store operations to introduce cost efficiencies and offer shoppers lower prices, which help it to compete against discounters.

Tesco Poland sees biggest decline in sales in 2018 in the region…

Tesco Central Europe reported a 4.5% drop in 2018 sales at constant exchange rates, to reach GBP6.0bn (US$7.6bn). This was partly explained by a 2.3% decline in like-for-like sales, due to Tesco’s non-participation in Black Thursday promotions in the region. The performance was also affected by a 9.1% sales decline in Poland, due to the loss of 25 trading days from the Sunday ban and the closure of 62 stores.

…but grows profit significantly

Although sales growth was a pain point for the central European operations, it reported an improvement in its operating margin from 1.8% in 2017 to 2.9% in 2018. A significant part of that is from the closure of unprofitable stores in Poland. But was also due to costs efficiencies introduced in the store and logistical operations. In addition to lowering costs, these efficiencies also helped to raise sales density by reorganising ranges and store operations to lower prices and attract more shoppers.

Repurposing of space in large formats stores continues

As part of the three-year transformation programme, Tesco has repurposed space by renting it out to third-party retailers. This is in line with shopper trends in Poland where they shop little and often. To help raise a revenue stream and lower costs in its larger stores in 2018, it added 22 new tenants to 14 hypermarkets. It also partnered with an insurance provider in 2019 to open 32 Superpolisa Ubezpieczenia outlets in Tesco stores. Similarly in Tesco Hungary it has added Media Markt shop-in-shops in nine hypermarkets.

Source: Super Polisa

Managing stock level and rotation

As hypermarket space shrinks so does the number of SKUs in Tesco Poland stores. The retailer is optimising its assortment by removing unprofitable categories, such as electricals, and focusing on more sustainable ones, such as baby. It introduced cost efficiencies via inventory management, which reduced stock levels and lowered replenishment frequency. This has translated into less transportation, reduced storage space, optimal use of store warehouse space and fewer out-of-stocks.

Fewer price changes and use of back-office staff

Across Tesco Central Europe it reduced the number of price changes by 28% in 2018, as many prices were reduced on a more permanent basis. Also, some back-office staff duties were moved to the shop floor to support in customer service and shelf replenishment.

Prices on food staples permanently lowered…

The retailer removed unprofitable assortments to focus on 600 basic food products, which it marked as Starlines, and promoted under the Nasz Cena (Our Price) tagline. They have had their prices permanently lowered to improve the price-quality ratio and to help Tesco become price competitive. The products were also given more shelf space. The retailer seems to be responding to market conditions in central Europe, and especially in Poland, by adopting elements of an EDLP strategy.

Source: IGD Research, Tesco Poland

…and the visibility of private label ranges raised

In some categories it is raising the visibility and shopper awareness of its private label ranges. One key example is in the baby category, where it has reduced the number of brands and assigned more space to its 200 SKU own labels, entry price Gaga and core range Fred & Flo. It is building awareness about the new brands through sampling in selected stores, special store decoration, leaflets and POS materials.

Source: IGD Research

Sunday trading ban will continue to drag Tesco sales in 2019 and 2020…

Poland is phasing in additional Sunday trading bans to reach 40 days in 2019 and extending this further in 2020 to cover all Sundays. For Tesco Poland to turnaround its sales decline, its strategy would have to be focused on recovering sales from the reduced trading days in the next two years. So far it has shown little sign on efforts to offset the loss from these trading days, like its key competitors Biedronka and Lidl.

…and profits will be hit by possible new tax law in 2020

The Court of the European Union ruled against the European Commission’s (EC) case that the Polish government’s tax on retail  is a form of state aid. It remains the case whether the new tax structure will go ahead or not in 2020, as the EC can appeal this decision. If the tax does goes ahead then this will hit retailers with a 0.8% or 1.4% tax bill on turnover above PLN17m (US$4.4m) per month, which will also hurt Tesco’s efforts to return its Polish operation to profitability.

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Netherlands-based SPAR International reported sales rose 5.4% globally to €35.8bn. The organisation said entry into four new markets, the addition of 335 new stores and the continued focus on its ‘Better Together’ strategy had underpinned the pace of its growth.

2018 ‘an exceptionally strong year for SPAR’

Discussing the results, SPAR International’s managing director, Tobias Wasmuht, described the retailer’s performance as representing ‘another exceptionally strong year for SPAR’. Wasmuht went on to highlight the importance of the retailer’s ‘Better Together’ strategy, of which it was in the third year of five. The strategy is focused on ‘SPAR’s core ethos of uniting together the global scale and resources of the SPAR network so that all shall benefit’.

At the end of 2018, SPAR operated in 48 countries, with 13,112 stores under the brand accounting for 7,441,838 sq. m of selling space.

Continued strength across Europe

SPAR said sales grew by 4.1% to €22.1bn in Western Europe and by 15.8% in Central and Eastern Europe, to €5.8bn.

In Western Europe SPAR said its continued investment in its stores and the growing shopper trend of buying little, often and locally was benefiting its members, who operated neighbourhood-based stores. This trend was being accentuated by longer term trends, such as ‘smaller and single households, as well as aging populations and urbanisation’, which are likely to continue to benefit the retailer.

In Central and Eastern Europe SPAR gave more country-specific reasons for growth in the different markets where it operates. SPAR Hungary saw growth advance by 9.8%, SPAR Croatia by 15.3% and SPAR Slovenia by 4.1%. SPAR highlighted how its partners’ combined sales broke through the €2bn mark for the first time, with sales up by 27.8% in local currency terms.

Strong growth in Africa and the Middle East

Across the 15 countries where it operates, SPAR said sales rose by 8.2% to €5.9bn. South Africa continued to dominate its performance in the region, where it generated sales of €4.9bn, after growing sales by 5.7% at constant exchange rates. This was supported by fast paced growth in Botswana (+19.2%), Cameroon (+65.6%), Mozambique (+56.2%), Nigeria (+8%) and Zimbabwe (+39.1%).

There was continued good growth in the Middle East, where it said its partners had ‘been able to adapt and tailor their retail proposition in tune with modern consumers’.

SPAR approaches €2bn in sales in Asia

In its smallest region, SPAR said its seven countries’ operations generated sales of €1.96bn in 2018 from their 573 stores. China accounted for most sales, with its members generating sales worth €1.5bn in 2018 ‘with particularly strong growth in the Shandong and Guangzhou provinces’. It highlighted the importance of its members’ growing use of technology in-store, such as ‘facial recognition payment technology and engaging with customers instore through mobile applications, including scan & go solutions’.

Short term focus to remain on ‘Better Together’ strategy

SPAR said its performance in 2018, and over the last three years when it has generated a ‘compound annual growth of over 5%’ gave it the confidence to sustain its existing strategy. This will see it accelerate its international joint buying and procurement ‘ by further harnessing [its] international scale, pooling [its] global resources to reap economies of scale in all areas of [its] business and uniting [its] global partners to be and act better together’.

By region, SPAR said it expected to benefit from existing trends in Western Europe, expansion in Central and Eastern Europe, through the award of two new licence agreements in the region, with a similar reason given for its faith in driving growth in China. It noted that ‘plans are at an advanced stage for the expansion of SPAR in South and Central America’, which would see it enter the continent for the first time.