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Italy's a special case.

ROME -- To love food is to love Italy, so it is perhaps not surprising that the Italian food retail sector is one of the most comport tire, not on the basis of price but on quality, range and, above all, freshness.

Wander through the fish market in Naples and the olive and lemon groves in Liguria, and there will be no doubt. Walk into one of the thousands of local salumaria (delicatessens) around Italy but, perhaps above all, in Bologna, and the air is rich with the scented aroma of prosciutto, buffalo mozzarella, parmigiano, fresh pesto, truffle and pasta,

Italy's food heritage comes from her agricultural base and sprawling geography. Some 4,200 kilometers from north to south, and rising to 10,000 meters above sea level in places, Italy can grow anything from vine fruit to citrus, tomatoes to soft fruit, wheat tc rice--and the Italians certainly know how to make the most of it. They love their food and take pride in its ingredients, its preparation and its service.

A country of 57 million people, Italy consists of three distinct parts in terms of retailing, or almost anything else for that matter. Draw a line east to west across Rome and one divides the wealth and development of the North of Italy from the much poorer rural economy of the South, the only exception being the Western coastal strip with its spectacular scenery, climate and tourist retreats. And then there is Sicily, the island off the toe of Italy and a region to itself.

In terms of retailing Co-op Italia dominates, especially from Rome southwards, assisted by the preferential access to land owned by the state and the church and the tax relief granted to the co-operative movement. Co-op Italia is owned by its 4.7 million member's who run 70 Iperco-op hypermarkets, over 1,000 co-op supermarkets, a growing discount chain--Di.Co (a franchise from the German retail group Tengelmann)--and the 27 OBI DIY stores in Italy.

Although its origins are old, Co-op Italia only really hit its stride in 1988 when the first hypermarket opened, but now it is seen as dominating the Italian retail scene. True though this is, 12.5% is not a category-killer market share, especially when this penetration is largely concentrated around Rome and in the South. In the past much of its strength was driven by its ownership of the purchasing group Conad, but this was split in 2003 when Leclerc obtained a managing stake in the group.

The dominance of co-operatives in Italy and the need for a partner or, at least, local knowledge to trade in the Italian market have meant that international groups have been slow to enter the country. The French group Auchan was the first to begin the dialogue. The partnership between La Rinascente (the Italian-owned department store group) and Auchan began in 1989, when they opened four hypermarkets. However, the real starting point for the group was the creation of Ifil with the Agnelli family in May 1997, a finance vehicle through which Auchan became co-owner of La Rinascente, the second-largest retail alliance in the much-fragmented Italian market. With two chief executive officers, one for each part of the business, the fifty-fifty joint venture group has operated in two distinct halves for seven years. Despite speculation over separation and a weak trading period for the nonfood arm of the group it continues to grow. Its 38 Auchan hypermarkets generate 40% of total turnover, and Sma supermarkets a further 40%; little wonder, then. that Auchan no longer sees the La Rinascente department stores and Upim variety stores as a core. There is one other fast-growing part of the group, and that is Bricocentre DIY which, while only contributing 4.9% to group sales, is a good rival for the Co-op's OBI format.

Carrefour's entry into the Italian market followed a similar route, complicated by its own acquisition: Promodes SA. GS, an Italian group dating back to 1961, merged with Promodes in 1997. When Carrefour acquired control of Promodes and, with it, GS in February 2000, it was propelled into the No. 3 position in the Italian retail market. Prior to this it had literally only tinkered with seven hypermarkets and 45 Picard frozen food stores.

Carrefour has put relatively little investment into Italy; some stores still have the basic GS fixtures, but the operation now has 40 hypermarkets all under the Carrefour banner, 379 GS supermarkets and the very successful Di Per Di 645-strong convenience store chain. The key differentiator is the tar higher proportion of private label goods than competitors, including the Terre d'Italia range of locally sourced products.

Back to the true Italian groups. Conad is another Italian cooperative. Mentioned earlier, it was essentially a buying group for retailer co-operatives and some 3,000 Conad and Margherita neighborhood stores. Since the purchase of a 40% stake in the company by the French retailer Leclerc in May 2001, plans have been formalized to rename the established six Pianeta banner stores and open another 30 hypermarkets by the end of 2005.

These four might make up 36% of the Italian retail food market, but much of the real color lies outside of their doors. Every town boasts its own specialists and food enthusiasts, and from these origins have sprung four further groups worthy of mention and a visit.

Bernardo Caprotti, retailing guru, and founder and chief executive officer of Esselunga, has made the "E" synonymous with food shopping in Milan. A public company, with the majority of shares owned by the family, its supermarkets are to be found from east to west across Northern Italy.

Esselunga produces its own ready-to-eat meals and bakery products, marketed under its own label. It is renowned for quality and freshness and the huge billboard advertisements that span the arterial roads into and out of Milan. This business has often been called the jewel in the Italian crown, and not without reason. Caprotti has evolved an operating model and retail profitability second to none. It has been courted by all the international players, and most of the international banks. However, Caprotti's most quoted line is, "This business is not for sale."

Nestled above Esselunga, and dotted throughout the Italian lakes, is the lesser-known Bennet. Comb-based Bennet is owned by the Ratti family of silk-production fame. Its aspirations are to dominate hypermarket retailing in the North, and this is entirely possible given the land banks in the family from its silk heritage.

Bennet has 38 stores that used to be popular with the Swiss, who crossed the border to take advantage of exchange rates and stock up on magnificent food at low lire prices. That habit ended with the advent of the curb, which now has Italians going over the border to shop at Migros in Switzerland.

The third is Gruppo Pam, again a publicly owned company, the majority of shares being owned by three Italian families. Centered in Venice, in the far Northeast of the country, the group operates 17 Panorama hypermarkets and some 200 supermarkets under the Pam and Met banners. It also owns some 200 Ins discount stores.

To understand how Italian retailing operates, and why the market remained relatively impervious to foreign intervention one needs to understand Italian buying groups. The top five retailers' average European market share is 57%--in Italy it is 16.6%. The modernity index, i.e., the share hypermarkets and supermarkets have of the grocery trade in Europe, averages 77%--in Italy 57%.

Why? Low growth is driven by difficulty in obtaining planning licences, the need to purchase these from traditional trade outlets, the concentration of wealth north of Rome--and the buying group structure. In 2000 there were 17 buying organizations in Italy, all with their own specific retail alliances and considerable power. Consolidation of groups, partly as a result of the entry of international players and their role in the groups (e.g., Carrefour, Finiper, Unes group), partly as a defense against their entry (e.g., Esselunga, Selex, Angora group), has resulted in 10 groups, with the top five controlling 87% of food market trade in Italy. Are terms transparent? No. Is membership transparent and loyal? No. Are they effective? Yes, indeed. The way the Italian buying groups negotiate price and tie down a market might well serve as a model for the WWRE (World Wide Retail Exchange) and GNX (its French-based equivalent).

As to that fourth retailer--go to Milan. There one is overwhelmed by the art, the architecture and the shops. The favorite Italian pastime of getting dressed up and going for a walk, fare la passeggiatta, in the fashionable streets is only enhanced by sitting and watching the strollers. Where better to do this than in one of the street cafes opposite the Duomo in all its glory?

But for some real entertain merit, one must go to Pecs. Nestled in the center of town in via Spadari, Pecs is a delicatessen and more. With a veritable food factory at the rear, it produces pasta, ready meals, desserts and confections to grace any table. Strong decision-making skills are needed at the cheese counter, 23 feet long, where customers are asked not only how much they want their cheese aged, but also their preferred granularity and end use. When they have chosen what to take home, and while the staff carefully vacuum packs and wraps it, they can saunter upstairs to the cafe bar and try a little crayfish and mushroom risotto, followed by wild strawberries and lemon juice.

Christine Cross is head of Christine Cross Ltd., a global consultant to retailing and manufacturing businesses and academic institutions. Prior to starting the firm in June she carried out a range of duties at the director's level at Tesco PLC. She can be contacted at:

Company         2003 Sales     Market Share

Co-op Italia   $  12.70 bil.         12.5%

Auchan            8.73 bil.           8.6%

Carrefour         8.13 bil.           8.0%

Conad             6.98 bil.           6.9%

Esselunga         4.04 bil.           4.1%

Others           60.75 bil.          59.9%

TOTALS         $ 101.33 bil.          100%

Source: Planet Retail
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Title Annotation:Spotlight; food market
Author:Cross, Christine
Geographic Code:4EUIT
Date:Aug 23, 2004
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