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Bright future for German retail trade paced by hungry QFF demand in east.

Bright Future for German Retail Trade Paced by Hungry QFF Demand in East

Impressive double-digit growth charted last year. Growing importance of private label products seen. Robust home delivery segment lures customers away from supermarkets.

Nineteen-ninety was an excellent year for the German food industry. With turnover of 249 million DM, a growth rate of 11% was realized. With this double digit increase, the food trade is far ahead of the general growth rate in the newly united nation. And in the process, markets in the east were absorbed almost completely by the old established retail groups of West Germany. Some 228 billion DM out of a total sales volume of 249 billion DM went into the tills of the "Club of 50."

Leading the "Top 50" is Metro with 30.5 billion DM turnover, followed by Rewe (27.5 billion), Aldi (24), Karstadt (17.7), Asko-Schaper-Coop (15.7), Tengelmann (15), Spar (13). Of the two leading East German trade organizations, only KONSUM has a chance of surviving. The state-owned HO trading organization will be split up and privatized.

Gold Rush in East?

The managements of leading German retail groups immediately realized the unique opportunity offered by the unification of the two German states. Almost overnight after the Berlin Wall's fall, volumes were boosted through takeover, cooperative agreements and special individual activities.

According to Lebensmittelzeitung, the Tengelmann Group ordered 2,000 new cash registers from ADS Anker, indicating that at least 700 new Plus Discount shops are to be opened in what was formerly East Germany. ALDI procured new registers for about 500 extra outlets. SPAR took over 400 former HO-Supermarkets and is investing about 500 million DM in same, while more than 1,600 small HO shops will be sold to private "entrepreneurs." Rewe estimates investments for the construction of a new retail system in the former Deutsche Demokratische Republik (DDR) will run some 280 million DM.

Foreigners might ask why the retail food trade has been so quick in establishing a solid foothold in the newly established free market regions, since other industries are encountering so many problems. The likely explanation may be that food products from the west were welcomed by East Germans hungry for a new quality of life. They snapped them up almost uncritically. In the meantime the new consumers have learned not only to distinguish between quality and price, but also have realized that not everything one desires is affordable. The number of unemployed is growing at a frightening pace, and money is scarce.

Hunting for Sites

Whenever concepts, assortments and prices are right, supermarket organizations expanding into East Germany could be almost certain of success. Shortly after unification "scouts" were dispatched from the west to explore prospects for the retail trade. Looking for local partners and store locations, they also tried to secure the best positions for their trading groups in an unknown territory whose structure was different from the West German one in every way. The most promising were in the new living quarters at the outskirts of the bigger cities.

Only occasionally could real estate or building sites be bought directly because the deeds or the legal claims of former owners could not be secured. However, some of the "eastern scouts" hired by the western companies have turned out to be masters of improvisation. They have innovatively set up shop in large tents, empty factories, abandoned restaurants, canteens or stores that were rented from the "Treuhand" (the official privatization agency in Berlin). Since the western products sold faster than the invoices of suppliers became due, there was often enough reserve to finance further growth. At the same time, liabilities could be kept as low as possible.

The Programmed Flop

However, the entrepreneurs depending on outside financing face additional costs, imposing on them a handicap that reduces profit. This will happen to many of the highly leveraged "young traders" who went into business with great expectations but little know-how about the free market system. After hastily renting empty shops they started careers with high hopes. It did not take long before most went bust in silence. When looking at the projects for large shopping centers in all new German provinces, it does not take a prophet to foresee major excess capacities in East Germany. This will most certainly lead to merciless competition and to the bankruptcy of many hopeful newcomers who lack experience and capital.

Nevertheless, economists expect the boom to continue. Even the European Commission predicts lasting growth for the retail trade in united Germany, although optimism has been somewhat muted because of the Gulf War and its consequences. But in the long run the future of the German economy looks very bright indeed. The impetus will affect mainly the manufacturers of consumer goods and the retail trade.

Unification Boosts Frozens

Prior to German unification retailers in the west were expecting linear growth of frozen food and ice cream, characterized by a steadily up trend in volume and a sharper rise in value. As in all comparable countries, this trend also turned from simple basic products like vegetables, fish fillets and chicken, towards convenience products, instant meals and specialties.

It is interesting to note that the driving force behind frozen food growth has not so much been the retail trade, but rather the home delivery services. This is a development which almost nobody expected, and which is certainly unique in Europe and in the world.

How rapidly these mobile services have expanded can be seen from the figures published in the German trade magazine TK-report. Whereas home deliveries served only 2.3% of West German households in 1976, the 1980 turnover increased to 11.9%, in 1984 it more than doubled to 28.7%, and in 1989 it climbed to 33%. In other words, one Deutschmark out of every three spent on frozen food went to the home delivery sector.

In spite of the success of the mobile home services, the retail trade foresees further positive developments in merchandising frozens at store level. Compared to other European countries, there are still hidden reserves in German frozen food cabinets. According to a survey of supermarket managers, published in the magazine Lebensmittel-Praxis, frozen food will again hold its place at the top of all food categories in 1991, following fresh fruit and vegetables, non-alcoholic drinks, "natural" foods and cereals (muesli). Frozens are associated with freshness, nature and health -- a combination meeting all important criteria influencing prospective buyers. This positive perception among consumers has encouraged Nestle to try a comeback in the German market with its Findus brands of Lean Cuisine and Buitoni products.

Chilled Almost Unknown

Compared to the successful development in neighboring European countries, chilled food seems to be getting nowhere in Germany so far. Said a spokesman for Pillsbury's Beeck GmbH: "We are ready and well equipped to step into this market, as soon as the trade gives us the green light." The results of test marketing a chilled line by Mars GmbH are also not very encouraging.

Unlike chilled meals, shelf-stable tray packs are being pushed into supermarket shelves as a great number of processors are trying to get a piece of this booming business. The frozen food industry regards the development with growing concern. Because of the generally good quality and the moderate prices of shelf-stable products, some customers are now turning away from the QFF cabinet.

After the initially furious rush to buy well known Western branded products, East German consumers are beginning to exercise a certain restraint. They have by now realized that many middle segment offerings are as good as premium products, and much cheaper. Trade insiders see this as pointing the way toward discount shops. Rewe buyer Bernd Schmidt views it as presenting an opportunity for private labels. There is already a large number of frozen food and ice cream products available under various store brands.

Undeveloped QFF Market

In the former DDR frozen food was not completely unknown, but the choice was still extremely limited and not at all attractive. Display cabinets there were usually half empty and neglected, while any new products were so expensive that nobody wanted to buy them. East Germany was an undeveloped QFF country, where neither temperature control nor general availability, neither freezer technical standards nor product marketing or quality were adequate. Plastic bags filled with apple sauce were placed next to frozen chicken broilers, peas and beans in grey cardboard boxes were shuffled alongside packs of unsavory ice cream that more resembled a runny pudding.

In fact, the distribution of food in the former DDR was restricted to basic products only. People did not starve, but convenience items of better quality were generally unknown. Only near the western border around Berlin could people get a visual impression through television broadcasts of the living standard that Germans in the Federal Republic had become accustomed to for many years.

Consumer Orgy in East

After unification, the look of eastern freezer cabinets, and consequently also the consumer's attitude, took a turn for the better. In many common activities western producers, together with wholesalers and brokers, opened the floodgates to a stream of goods that swept into the frozen food case and led to double digit growth of the QFF industry. All lines of products, as far as they fit into the limited cabinet space, gained from this boom. Pizzas (total value of 400 million DM) and frozen baguettes (worth 120 million DM) racked up 25% sales increase. Ready meals and fish products also jumped two-fold in volume.

Since the spring of 1990, ice cream and frozen food gained ground very fast in East Germany, mainly because of the cooperation of producers with the different supermarket chains. Thousands of freezers and cabinets were shipped from west to east. Today one can see gaudily-decorated delivery vans motoring over bumpy roads of the former DDR.

Private Label Prospects

Generally the outlook in the new German states and Berlin would be brighter if only personal income had not changed for the worse so dramatically. The number of unemployed is growing rapidly. Many people have to manage their money very carefully. In spite of their popularity, frozen products must not exceed a certain price range if they are to sell well. So there is an excellent chance for quality private label products to gain share if priced moderately in relation to branded competition.

There are bright prospects for frozen poultry and poultry-based ready meals. This is because poultry was considered a luxury product in the old DDR, and was consequently not subsidized like other "basic" food groups, making it too expensive for the average consumer.

Now, since these subsidies for food products have been eliminated, poultry seems to be comparatively inexpensive. It is sold at the same price charged in the western area, an economic fact that makes the future of chicken and turkey farms and processing plants brighter in the eastern states than the future of many other food groups.

Progress After Change

Within the next few years the food trade and industry in the eastern region will adapt to western levels. The majority of the many small shops that have sprouted after unification will vanish. Large supermarkets will handle the requirements of the population. The number of workers will be reduced and many of those remaining gainfully employed will have to change from manual labor to brain work. A people whose initiative was paralyzed by 40 years of centrally planned, communist inefficiencies is beginning to learn that a free economy does not only mean a higher level of consumption, but also a better and faster level of production. For many this will be a painful but healthy experience.

The times are certainly changing, and so is QFF marketing.

PHOTO : Unsightly lidded freezer chest made up the frozen food department of a state-owned store in Magdeburg, DDR, prior to unification of the two Germanies.

PHOTO : After being refitted by Linde, frozen food departments in former East German supermarkets exhibit the same high standard as stores in the West. Here, too, pride of place is taken by modern island-style display cases glazed on all sides.

PHOTO : With property ownership still undetermined in many localities following German unification, unconventional ideas are all the more called for. Co Op Schleswig-Holstein rented the better part of the buildings on a pontoon moored in Rostock (eastern Germany) for a plaza self-service store equipped with Linde refrigeration display cases and refrigeration systems.
COPYRIGHT 1991 E.W. Williams Publications, Inc.
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Title Annotation:QFFI Special Market Report: United Germany; quick frozen foods
Author:Heck, Hans
Publication:Quick Frozen Foods International
Date:Apr 1, 1991
Previous Article:Frozen food freshness will quickly conquer the east.
Next Article:As German frozen food sector booms, once-ailing warehouses rebound nicely.

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