Retail sales of food and drink in Europe’s largest markets are at a standstill, leaving European grocery retailers hungry for opportunities to grow. Most leading retailers have already tried e-commerce, with limited success, and expansion abroad, often with more. But almost all have ignored the big, profitable opportunity in their own backyard: the wholesale food and drink trade, which appears to be just the kind of market retailers need.
Wholesale food and drink sales in France, Germany, Italy, Spain, and the United Kingdom (together representing about three-quarters of the European market) came to €166 billion ($167.9 billion) in 2000—more than 40 percent of retail sales. Moreover, average overall margins are higher in wholesale than in retail; wholesale demand from the food service sector is growing quickly as more Europeans eat out more often; and changes in the competitive dynamics of this fragmented industry are at last making it feasible for wholesalers to consolidate. All in all, this clearly seems to be a market in which big retailers could profitably apply their gigantic scale, existing infrastructure, and proven skills in the management of product ranges, logistics, and marketing intelligence.
Retailers that master the intricacies of wholesaling in Europe stand to reap substantial gains thereby
At least, that is how it looks in the aggregate. Closer inspection reveals important differences among the biggest national markets, especially in their customer segments and wholesale structures, as well as the competitive dynamics of individual food and drink categories. Big retailers must understand these differences before they can identify the segments of European wholesaling in which their particular abilities might unseat smaller but entrenched competitors. New skills and unfamiliar business models are needed too. But none of these requirements should deter large retailers (and even some large food producers and existing wholesalers) from trying their hand, for those that master the intricacies of wholesaling in Europe stand to reap considerable gains.
A map of wholesaling
Despite variations in detail, wholesale markets in the countries we have examined closely—France, Germany, Italy, and Spain—are made out of the same building blocks. Demand comes mainly from two sources: independent mom-and-pop grocery stores, which unlike large retail chains are too small to buy direct from producers, and food service operators that cater to consumers when they don’t eat at home. Such food service operators range from snack machines to large institutional catering ventures, but most of these businesses are known in the trade as "horeca": hotels, restaurants, and cafés (or, in some countries, catering).1
On the supply side, there are two types of wholesalers. Cash-and-carry ones operate stores, similar to warehouses, where they sell food and drink, mostly to traditional retailers and smaller horeca.2 Customers select and take away their purchases themselves. Delivery wholesalers, by contrast, deliver goods from their warehouses direct to their customers, mostly midsize or large food service operators. Both types of wholesalers abound in each food category, but delivery wholesalers are particularly numerous; generally small, local family businesses, they supply 50 to 60 percent of the market in all countries. Cash-and-carry outlets serve 10 to 20 percent of it, and other intermediaries, such as retail hypermarkets and a few food manufacturers, supply the rest.
Overall, Europe’s wholesale market for food and drink is growing at the same sluggish pace as the retail market, but the aggregate figures mask two opposing trends. The first and more important is the consumer’s growing preference for eating out: consumption of food and drink in places other than homes has risen from about 32 percent of total consumption in 1995 to 35 percent in 2000 and is expected to approach 38 percent by 2005 (Exhibit 1). This development is boosting wholesale demand from the food service segment by 4 to 5 percent a year across Europe, compared with growth in retail demand of 1 to 2 percent. Moreover, demographic change—particularly the increase in the proportion of older, wealthier people in the population—will probably sustain this pattern.
The second trend—a decline in demand from traditional mom-and-pop retailers as large retail groups lure their customers away—to some extent cancels out the growth in demand from the food service segment. Nonetheless, retailers that can capture a share of the growth in food services will probably see revenues from wholesaling grow faster than revenues from retailing. At 2 to 6 percent, depending on the product category, profit margins3 for wholesalers are already higher than those of most organized retailers in many European countries; in Germany, for instance, organized nondiscount retailers have average profit margins of little more than 1 percent. Higher wholesale margins can be attributed partly to the fragmented nature of the industry and to the absence of fierce, nationwide price competition. Customers too are scattered and thus exert little pressure on prices. As a result, the European wholesalers’ profit pool, which in 2000 amounted to about €2.3 billion in Germany, France, Italy, and Spain, was equivalent to 45 percent of total retail profits in these countries—very appealing.
Retailers are not yet in wholesale
Europe’s food and drink wholesale markets, despite their many attractions, have won little serious attention from big retailers. Several of them, including Carrefour in France and Rewe in Germany, own cash-and-carry chains. But only the German-based retailer Metro, which operates more than 400 cash-and-carry outlets in 23 countries and is expanding into Eastern Europe and Asia, has succeeded with this format on a global scale.
Even fewer retailers have attempted a delivery wholesale business in Europe. The Dutch retailer Ahold operates a delivery wholesaler, Deli XL, that offers all food and many nonfood categories to food service operators everywhere in the Netherlands and is currently planning to expand its model into other European countries. The Italian company Marr, part of Cremonini, is scaling up a similar one-stop business targeted mainly at caterers. And in Germany, GV Partner delivers food and nonfood categories alike, from an offering of 25,000 stock-keeping units, throughout the country.4
But these large-scale retailers are the solitary pioneers in wholesaling, for their peers are deterred by certain unattractive features of the market. For a start, demand has been too fragmented and diverse for large companies to benefit from their scale. Europe has about 230,000 traditional retailers and 1,700,000 horeca outlets, with needs and buying habits that differ according to size, business models, and national preferences, among other factors. A customer base of this kind suggests that large retailers must offer many different product ranges and services as well as complicated last-mile logistics. These retailers have little experience in such areas.
Second, customers—particularly food service operators—care so much about high-quality produce and reliable service that they prefer to form relationships with trusted suppliers. Delivery wholesalers must therefore provide personalized service and local sales forces, which big retailers lack. Finally, the heterogeneous nature of fresh-food products, which account for up to 60 percent of wholesale purchases, and the erratic quality and quantity of supply in several categories, such as fish and vegetables, have made it difficult for wholesalers to develop standard offers and to scale up purchasing accordingly.
It is thus no surprise that the supply side of wholesale has also remained fragmented (Exhibit 2). Each country has hundreds, sometimes thousands, of "last-mile" suppliers—mostly tiny, unsophisticated local companies selling a single category of products. In Spain, for instance, about 8,000 wholesalers battle for a share of the wholesale fish market; in fruits and vegetables the figure is almost 10,000. Even in Germany, where supply is more consolidated, the meat market is still divided among some 2,000 wholesalers. In most cases, these little family firms base their successful relationships with food service operators on personal contact with their customers and on friendly service, not on scale, efficiency, or strong management—the capabilities that win a competitive advantage for big retailers in their core markets.
Winds of change
Now, however, demand from food service customers is becoming less fragmented and more standardized, creating opportunities that fit the big retailers’ existing capabilities. Large food service operators—such as international catering companies, restaurant chains, and hotel chains—are expanding and attracting a growing share of the market from smaller independents. By 2010, we believe, large-scale operators will account for about 40 percent of food service sales in Europe, compared with about 30 percent today. Such operators like to buy centrally; they place large, homogeneous, regular orders; and they prefer suppliers that offer competitive prices and national coverage. All are requirements that big retailers can easily fulfill.
Several trends are beginning to smooth erratic supply patterns in certain fresh-food categories
At the same time, improved production technologies such as fish farming, freezing, and "precooking"5 have made the products themselves less variable and more susceptible to bulk management—a development reinforced by mandatory EU-wide food standards. Together, these trends are beginning to smooth erratic supply in some fresh-food categories by making products more like commodities and enabling wholesalers to develop standard large-scale offerings. This transformation bodes well for large retail chains that already base their business models on standardization and on scale in sourcing and distribution.
In the cash-and-carry segment, conditions now favor more consolidation among suppliers. As competition from bigger, better-organized retail groups drives traditional retailers out of the market, cash-and-carry wholesalers in countries such as Italy and Spain, where traditional retailing still accounts for most sales, are finding their profits squeezed. Smaller companies are beginning both to consolidate and to focus more on food service operators. But in these conditions, large cash-and-carry chains belonging to big retail groups such as Metro are likely to prove more effective consolidators, given their access to capital, their skills, and the existence of established structures for absorbing smaller players.
What retailers must do
These changes certainly make wholesaling more attractive to large retailers. But how can they use their existing capabilities to gain advantage over smaller, established wholesale operators that have a deeper knowledge of the customer? Large retailers have a choice of three broad routes.
First, they could use their scale to buy up and consolidate small cash-and-carry or delivery wholesalers into more profitable, larger operations. Using their strengths in purchasing and marketing as well as their experience with a number of food categories, they could improve on the gross margins of smaller companies by, for example, pooling purchases, developing private labels, and devising more intricate pricing techniques. A broader assortment of products would help retailers-turned-wholesalers attract more customers and increase their average bill. In addition, these retailers could save money on costs by plugging the operations of the companies they acquire into their own centralized logistics systems.
Such methods have been used over the past few decades to consolidate the retail market. We estimate that by taking similar steps, large retailers could improve on the sales profitability of smaller wholesalers by an average of 2 to 4 percent. Metro Cash & Carry, for example, already operates at an earnings before interest and taxes (EBIT) margin of roughly 3.5 percent of sales—competitors in Germany rarely reach 1 or 2 percent—and the Italian delivery wholesaler Marr achieves a margin of 4 percent.
The second route for large-scale retailers would be to offer a better value proposition than existing wholesalers do and thereby achieve higher revenues and margins. Almost all horeca managers we interviewed choose their suppliers on the basis of reliable delivery times, good products, broad offerings, and a simple purchase process—but few of them believe that existing wholesalers can meet all of these criteria. Horeca managers also want their suppliers to provide business-enhancing services, such as advice on selecting wines. Here, then, is an opportunity for large retailers to exploit their already well-developed assortments, managerial skills, integrated purchasing platforms (based on electronic data interchange [EDI] or the World Wide Web), and extensive distribution networks to establish a better, nationwide offering of consistently high-quality products and services.
Large retailers will have to improve their direct delivery too, but the pioneer companies have already shown the way. Ahold’s Deli XL, for example, offers 60,000 stock-keeping units through a single contact point and delivers more than 99 percent of all products within 12 hours of the placement of an order. Marr guarantees delivery of about 10,000 products within 24 hours of receiving an order—within 12 hours for products whose freshness is critical—to more than 30,000 customers all over Italy.
Third, in some product categories big retailers, by integrating the supply chain from production to delivery, could meet the customers’ needs more efficiently than does the competition. Buyers of wholesale meat, for instance, increasingly want to know the provenance of each cut they buy—information that is easy to provide if the wholesaler has also slaughtered, processed, and packed the meat. A supplier that offers this seamless process on an efficient scale will enjoy lower costs than will competitors whose meat goes through the usual channels. For certain products, some retailers have already built processing facilities that supply their retail stores and might be able to serve wholesale customers as well. Retailers that lack manufacturing skills could consider alliances with packaged-goods manufacturers.
Opportunities to pursue these three strategies will vary from country to country (see sidebar, "Country variations"). But our projections suggest that the opportunities for wholesaling in European markets are likely to be more valuable and readily seized than, say, the opportunities for recent Internet and financial-services ventures. We estimate, for example, that a large, consolidated company with a 40 percent share of Spain’s cash-and-carry market would have sales of roughly €1 billion and EBIT margins of more than 3 percent. A one-stop delivery wholesaler that captured just 5 percent of sales to small and midsize food service operators in Italy would achieve similar results. And in Germany, a consolidated delivery wholesaler with a 15 percent market share in a single food category (meat for midsize and large horeca, say) would have sales of about €1 billion and profits equaling some 2 or 3 percent of sales.
Transferring old skills to new markets
To rise to the challenge of wholesaling, retailers must find out precisely how they should transfer their skills to this new market. How can the retailers use their knowledge of range building for end consumers to assemble assortments for horeca customers? How will best practice in distribution from central warehouses to retail outlets be applied to the delivery of goods to hundreds, even thousands of horeca customers? And how can companies use their managerial skills to identify and capture synergies along the supply chain as they consolidate smaller operators?
First, big retailers must understand wholesale customer segments and their competitive dynamics
First, big retailers must understand the customer segments in wholesale markets, the competitive dynamics of those segments, and the factors that make for success in each product category—all of which differ from their equivalents in retail segments. Without such an understanding, retailers will find it hard to select target segments or to give them the assortment, pricing, promotions, and services they need. Deli XL, for instance, thoroughly investigated the main requirements of the kinds of food service operators it wanted to serve before it developed its one-stop delivery wholesale model.
Second, retailers must decide on the most appropriate business system. Extending a retail system to the wholesale business won’t work; on the contrary, these companies will have to design their wholesale business systems from scratch, starting with their existing product knowledge and their new customers’ needs and then working backward with a business-to-business, wholesale mind-set and largely ignoring their retail operations. Ahold, for instance, designed the business system of Deli XL exclusively to serve wholesale clients, and Deli XL’s processes are separate from those of the retail business, with a different assortment and order-taking processes and a separate sales force. At a higher level, however, Ahold captures the synergies of the two businesses in bargaining power and brand recognition.
Finally, if a retailer is to persuade horeca players to trust its wholesale ventures, it must hone its service skills. For most large retailers, this will mean investing in last-mile logistics, a sales force, the management of key customers, credit capabilities, and even brand awareness. Deli XL, for one, had to develop new warehousing and transport systems as well as new customer-service techniques to satisfy unfamiliar wholesale customers.
The challenge of Europe’s wholesale food and drink markets is a demanding one. But we believe that it is worth facing, especially because the food service segment—the biggest slice of an already large European pie—is still at stake. Companies that win a share of this segment now could enjoy huge advantages as it gets bigger.
About the Authors
Javier Castrillo is a principal and Jose Manuel Martinez is an associate principal in McKinsey’s Madrid office; Dieter Messner is an associate principal in the Vienna office.
Notes