European Retail Briefing - December 2016
Analyst Comment
 
ITALIAN FOOD DISCOUNTERS
The two leading discount chains in Italy, by store numbers, are home grown. Aldi does not operate there yet (although there is media speculation that its arrival there is imminent) and Lidl is in third place. But the two home grown businesses – Eurospin and MD – owe much to their German role models.

The combined turnover of the top three businesses is approaching €9bn – about 7.5% of all food retailers’ sales.

MD
The present MD group was formed in 2013 when Lillo, the holding company for the MD chain, bought the LD chain. In simple terms MD operated in Southern Italy and LD in the North. The business now comprises some 700 stores (including 230 trading as LD) and had turnover in 2014 of €2 billion. However, as MD has 120 franchise stores, the actual total at retail values is higher.

We think that MD is sensible to have kept the LD fascia. The extra cost of marketing is surely worth it for the goodwill attached to the name. In every other way the businesses appear to have been brought together. They now have common promotional literature and so are broadly similar stores. We visited an MD.

Eurospin
Eurospin was founded in 1993 – at roughly the same time as MD. But it has grown faster and it has also expanded abroad. It now has 1,000 stores, of which 43 are in Slovenia. It has full national coverage in Italy. But the business is still expanding – there have been nine new openings in the last three months alone.

MD – More service
The MD store we visited was rather smaller than the Eurospin – under 1,000 sq m rather than over. 
 
Right from the start the message is about value for money. It is not just about low prices. That is the key to good discounting everywhere, not just in Italy

But it is also about quality. There’s a good produce display.
 
More unusually for a discounter – there are service counters.
 
Display is minimal with the use of cut case where possible – as with these displays.
 
There is a heavy emphasis on own brands, though there are some branded products as well – such as Pepsi and Coke. As one would expect from the Aldi-Lidl model, there are also opportunistic non-food ranges.
 
Eurospin
The Eurospin store was much larger.
 
There was the same emphasis on cut case display and store standards were notably good with excellent fresh foods.
 
But there were no service counters. The whole Eurospin concept is closer to Aldi/Lidl. It has taken on board many of the developments seen at Aldi and Lidl in the UK, notably a much strong fresh food offer. But unlike MD, it has not introduced service counters, though in this store there was a butchery preparation department.
 
Also, unlike MD, the range was almost 100% own brand, even in soft drinks.
 
Where next?
These are two strong performers. They have learnt lessons from Aldi and Lidl about ranging and own brands and they have developed strong chains. Lidl and Aldi, though especially the latter, have been cautious in developing outside their home markets. It is understandable that they have been nervous about entering Italy, a notoriously underdeveloped retail market and one equally difficult to expand in. But their caution has opened the way for these two local players, which have both clearly modelled themselves on the German leaders. 

That does not necessarily mean that it is too late for Aldi, though it would certainly be a major challenge to establish itself in Italy now.

Unfortunately there is minimal financial information for any of these Italian chains. They are all private and Lidl is the most secretive of any food retailers in Europe that we are aware of. 

We estimate that sales per outlet at Eurospin are over €3.5m and, after adjusting for the franchise element, at MD they are about €3.1m. However, given the small size of the MD outlets, that is to be expected. But that suggests an average sales per sq metre of around €3,500, which is low by food retailing standards elsewhere. Even so, the expansion plans of both chains do suggest that they are profitable and cash generative.

The combined market share of the top three discounters is modest by standards further north, so all three major discounters in the market should be able to maintain a rapid rate of expansion for some time.