22 February 2006
If you can’t beat themThe supermarket scene is currently in turmoil with foreign-owned chains eyeing the small Maltese market and Maltese investors seeking ways and means of surviving the harsher competition that is developing.
Two years ago when Sisa, the first foreign chain, opened in Malta, a group of Maltese supermarket owners got together to combine their financial resources to be able to compete on what they believed could be a level playing field. That effort was undermined by the authorities who decreed the arrangement as being a cartel.
With competition from abroad growing harsher, as German discount chain Lidl is soon set to open its doors, investors forming the Shopwise Group felt they had no other choice but to seek a foreign partner themselves.
RAY MINTOFF, one of the shareholders in the Shopwise Group says that to be able to compete with the foreign-owned chains, the Group entered into an agreement with France’s Carrefour. It is the typical ‘if you can’t beat them, join them’ philosophy.
The Group’s new supermarket in Naxxar, which is slated for opening by October, will be offering a number of competitively priced products under Carrefour’s franchise brand GS.
“We had no other choice but to join one of the foreign chains and we chose the best one in Europe,” Mintoff says. “If we did not reach an agreement with Carrefour we would have simply vanished from the supermarket scene and in a couple of years’ time it would have been solely dominated by foreign investors.”
Mintoff acknowledges that the supermarket scene is currently unsettled with the investment that is pouring into it. The Naxxar supermarket alone will have cost a total Lm4.5 million. The market will eventually have to settle down, he says, confident the Shopwise Group will be in a strong position to weather the storm.
What investment have you put into this supermarket?
We calculate that the total investment would top Lm4.5 million. The project includes 20 apartments and nine penthouses, a supermarket on two levels connected by walkways not lifts and a three-storey underground car park.
What turnover are you expecting from this supermarket?
The highest turnover possible but we are projecting a yearly target of between Lm5 and Lm7 million, which is a conservative figure.
How many people will be employed when the supermarket is fully operational?
We will employ around 130 people.
By when will the Naxxar supermarket be operational?
We are hoping for June but in all probability we will open by October.
How many clients can a supermarket this size, cater for? What is your catchment area?
A foreign supermarket covering an area of 5,000 square metres normally caters for an area of 400,000 people. It does not mean a supermarket that size will be the sole reference point for that catchment area. You will still find smaller shops and supermarkets in the town centre.
In our case, with a supermarket covering 3,000 square metres and situated in centrally located Naxxar, we expect to serve a catchment area that includes the surrounding localities such as San Gwann, Mosta, Gharghur, Lija, Iklin and possibly a part of Birkirkara apart from Naxxar itself. This means we will be catering for around 60,000 people.
We estimate the supermarket will be serving around 4,000 customers a day.
The supermarket sector is seeing a rush of investment with new chains coming over from abroad and Maltese investors also entering the fray. Competition is getting harsh. How will you be confronting this challenge?
We have been investing for the past 15 years in our different supermarkets. Our pace was slower than that of other investors but we did not stop. The arrival of foreign supermarkets has changed the name of the game. As long as we were Maltese investors competing between us, we were all on the same level playing field.
But the foreign chains have a tool in their hands that is unavailable to Maltese investors; they have direct access to a larger market abroad from where to purchase their goods at advantageous prices.
We were constrained to join forces with the French chain Carrefour by utilising its franchising label ‘GS’, which is very strong in Italy, so that we would be able to benefit from the same advantages the foreign supermarkets are currently benefiting from.
An individual Maltese supermarket cannot create a full colour catalogue that costs thousands a month to produce. The foreign chains have the support of the mother company abroad and so can easily invest in these catalogues.
We had no other choice but to join one of the foreign chains and we chose the best one in Europe.
Can the market sustain this competition?
Consumption levels generally remain what they are. One may try to increase them slightly by offering a better service but this will not increase income by thousands of liri a year. It is only a better performing economy that will stimulate more consumption.
In today’s environment we have to see whether the older supermarkets are also gearing themselves up for competition because if that is the case competition will become harsher and it will take some time for the market to settle down. We are confident we can survive the competition despite the difficult environment.
What advantages does your association with Carrefour give you as investors and what does it mean for customers?
It means the survival of Maltese investors like ourselves who have put their money into the supermarket sector. It will also benefit consumers because we would be able to offer foreign products at reduced prices.
Furthermore, if the market demands certain services which as Maltese entrepreneurs we will not be able to foot on our own we can turn to Carrefour for their technical expertise and financial backing.
The strength of Maltese investors is limited by the size of the market. At the moment we depend on the purchasing power of our suppliers but by joining forces with Carrefour we can benefit from their stronger purchasing power which we can then pass on to our customers.
This will enable us to compete better with the foreign chains that are opening up in Malta.
Two years ago when Italian chain Sisa entered the market, a number of Maltese investors including yourselves had joined forces to compete in a more effective manner by issuing joint brochures and offering discounted prices. Since then you seem to have changed your mind and sought an agreement with a foreign chain. What happened?
I admit there was a change in the way we look at things. Initially we believed that by joining forces, Maltese supermarket investors could have the strength to compete with the foreigners. But even our joint effort did not give us enough strength to compete. We were constrained to join forces with a foreign group to give us the necessary leverage.
Even legally we had no choice but to look abroad for partners because when the Maltese investors joined forces the regulatory authorities deemed it was a cartel.
A foreign supermarket opening six stores in Malta with the backing of another 6,000 stores in Europe can operate here without any problem but different Maltese supermarket owners getting together to compete is considered to be a cartel.
Our intention was never to create a cartel. We simply wanted to have more purchasing power which we could then pass on to the consumer.
Even in terms of advertising, the cost for a single Maltese-owned supermarket is exorbitant when compared to what it would cost a foreign chain with marketing backup from abroad. If we did not reach an agreement with Carrefour we would have simply vanished from the supermarket scene and in a couple of years’ time it would have been solely dominated by foreign investors.
Will all the supermarkets in the Shopwise Group benefit from the Carrefour association?
Yes and there are another seven supermarkets outside the Group that will also benefit from the arrangement.
What relationship will you have with Maltese importers and suppliers?
As far as is possible we are trying to continue working with Maltese suppliers but from the experience of recent months it is evident that we cannot work only with them. For their prices, Maltese suppliers depend on the foreign company from where they import and are constrained by it. But we cannot compete with the foreign supermarkets that are not buying from Maltese suppliers and who in the near future will depend 100 per cent on their direct contact abroad with manufacturers, if we continue to work with Maltese suppliers alone.
I cannot endanger my investment and the livelihood of my employees by insisting that I buy only from Maltese suppliers.
If we can continue to work within the current system whereby we purchase our goods from Maltese suppliers and still remain competitive in the face of foreign competition then so be it. We have developed a good relationship with suppliers but if the market has changed we have to change our ways to survive. Out of choice we would have opted for Maltese suppliers but we are being forced into seeking an alternative arrangement. EU membership has created new threats from foreign investors and we have had to find solutions to these problems.
Have Maltese investors learnt any lessons from the Price Club debacle?
I do not really want to comment on the issue but in some ways we have had to pay for what happened because after the collapse suppliers became more stringent in their credit terms. But I don’t think the same mistakes are being repeated even though the supermarket sector is currently in turmoil.
Are there any projects in the pipeline after this investment?
We first want to consolidate this new venture before branching out into more investments. The investment we are putting into the Naxxar supermarket is hefty and given the turnover possible in a restricted market like Malta it will be some time before we would be able to venture into a similar project.
I do not exclude further investment but not in the immediate future.
The economy has been underperforming for a number of years. Are you waiting for a recovery to consider further investments?
I don’t think the state of the economy has an impact on what investment is made in the supermarket sector. The situation is not so bad as to warrant a reconsideration of investments but it is more a question of waiting for the market to settle and see what intentions foreign investors have. No Maltese investor on his own can ever open six stores at one go as some foreign chains have been saying they will do and it would be a shame to see an investment of this size, especially if it is Maltese money, go bust.
How have consumer patterns changed over the last few years?
Consumers are used to purchasing a host of different items, ranging from a can of peas to a household appliance, from supermarkets and that has influenced our business. This also means consumers have much less time on their hands and prefer to shop in one place. For this reason we will be introducing a faster method at the cheese counter and the butcher shop by providing ready-packed items which consumers can simply pick up. The items will be freshly packed and consumers would also be seeing the packaging process happening before their eyes.
Consumers want the best product at the best price offered with the best service. It is not an easy combination because good products and services come at a cost but once found it will prove successful.
We cannot forget that apart from other shops we also compete with street and door-to-door hawkers who do not have the same obligations as we do in terms of hygiene standards and permits. These hawkers are still responsible for a substantial percentage of consumption.
In this changing landscape, is there still place for the small village grocer?
There is still place for small grocers. Abroad despite the influx of hyper markets and large discount stores, small grocers still thrive. They obviously have to update their standards to what consumers are expecting.
Ray Mintoff was interviewed by Kurt Sansone