Spanish leading supermarket chain Mercadona’s new private label policy, replacing the former “inter-suppliers” by a much wider base of manufacturers called “totalers”, is an authentic revolution. The industrial ecosystem which had been built by the Spanish leading food retailer, structured around a relationship model close to vertical, now enters in competition in a much more open market.
A new strategy
One year ago, in January 2019, all the Spanish economic press published the news in front page: Mercadona was publicly disclosing the decision to transform its private label’s supply chain, migrating to a wide base of 1.400 suppliers, which were named “totalers” in their genuine language.
In fact, this decision was the official death of a system which had been predominant since its creation, in 1998: a focus on a reduced number of manufacturing partners -namely 120-, to which the whole management of a product category (or at least, a significant part of it) was delegated.
These companies, named inter-suppliers, worked under a long-term collaboration framework, with an open book policy, through which both parts fixed every year improvement targets leading to better consumer prices. Mercadona acquired a deep knowledge of the supplier’s operations, and had a strong influence in R&D, logistics and industrial investments. Both parts were so much blended that, in case of finishing the collaboration, a 3-years delay was given to the provider for organising the spin off.
This model was praised in the academic community and presented in many business schools. Thanks to its implementation, the retailer built the biggest food cluster in Spain: in 2017 the company's annual report mentioned 249 factories, more than 50.000 employees, and a total investment of more than 700 million euros.
Such kind of integration models are quite scarce in the European retail. We could mention the French Intermarché and the Swiss Migros for comparison, as both have powerful manufacturing networks into their corporate structures. The first of them owns Agromousquetaires, a conglomerate of 62 plants and 11.000 workers with 4.000 million euros overall revenue - being the fourth food industrial group in France. Nevertheless, as a difference, Mercadona’s strategy has never relied on owning the capital of its suppliers; all the most, they have brought financial support for accelerating their development, or for temporarily solving financial issues.
A long-term planned change
So, the former inter-supplier archetype has come to an end. To understand the genesis of such a relevant change, we will step back some years before, when Mercadona took the decision to transform its fresh products model. Their previous intent to manage this category in the same way tan dry food, with all the merchandise packed, had been a failure. The process was excessively centralised and industrialised, talking about products who need store closeness in order to achieve tight lead times. Mercadona’s chairman, Mr Juan Roig, uses to be crystal clear when he describes past failures: in the GS1-AECOC Congress held in 2013, he explained that “our custard apples were so hard that they rebounded on the floor, as if they were soccer balls” (I have extracted 90 seconds from the conference which is posted in Youtube).
The transformation of fresh products was the first renouncement to centralise category management through global suppliers. In the new model, purchasing decisions were taken at product level, with a much more granular view, attending different criteria: quality, proximity to logistic platforms, integration with the primary production.
As this process proved to be quite successful, it was only a question of time to see this philosophy translated to the rest of the assortment. This started to happen in years 2014-2015, with the entry of “specialist suppliers”: providers focused on concrete products, bringing unique quality and innovation attributes. Mercadona used to called them “gold screws” in their internal language. The internal impact of such a change was quite relevant: while in 2007 the commercial area had only 50 people in headcount, in 2017 this had multiplied to 900 persons working both in prescription (offer definition) and purchasing departments.
The results of this new policy are quite visible today when you visit a store. For example, the new beer assortment: where we used to have seven suppliers and own brand Steinburg was hegemonic, now we can see 40 companies, 19 of them artisan-type, providing 70 references. Another section which has transformed is oil: at the end of 2019 we could find 14 different manufacturers, a huge difference with 2015, when the supply was monopolised by Sovena.
Forced to reinvent themselves
The transformation we have described has a heavy impact on the companies who were previously leading the full provision of Mercadona’s brands: Hacendado (food), Bosque Verde (cleaning), Deliplus (beauty and hygiene) or Compy (pet food). All of them have gone through a competitive reassessment of their products. Despite many of them have been able to protect their position in the legacy range, they have also seen competitors entering the category for covering new consumer needs.
This bold move has a transcendental impact on the whole Spanish private label industry: the former inter-suppliers have broken the isolation in which they were confined, as they were working in a kind of exclusivity status for their main client, even if not contractually formalised.
So, the entry of the specialists in Mercadona’s supply map is a formidable kick into the existing playground, as it gives back to the inter-suppliers the possibility to sell to the rest of Spanish retailers. In fact, a porosity has been created between two “planets” who were working in an isolated way: 120 industrial companies with strong quality standards, excellent cost discipline, and high flexibility to adapt to consumer needs, have irrupted into the “free” private label market.
A new game in the domestic market
The war between the representatives of “Mercadona’s galaxy” and the companies supplying the rest of retailers, has just started. Some ex inter-suppliers had to overcome the initial prevention from buyers of other chains, as they were still perceived as a different DNA, having been so much blended with their main client. But this kind of feeling, quite subjective, always steps away in benefit of business realism. In the same way that we have seen around 1.300 suppliers entering Mercadona’s shelves, we are starting to see the reverse movement, as soon as the private label contracts from the rest of retailers are being renewed.
These negotiations are taking place with a high level of confidentiality, although some cases have already been made public: for example, the Portuguese Sovena -who has lost positions, as mentioned before, in Mercadona’s oil section- is now working for Carrefour.
In fact, this situation leads to a set of risks and opportunities that any industry working on private label -independently of which side of the ground they play in- should thoroughly assess before defining their growth strategy.
Introducing into the branded world
On top of entering to compete in their “natural” private label market, some historic suppliers of Mercadona are considering the possibility to build their own national brands.
As this is a quite different business model, we have very few examples in Spain. All the most, Casa Tarradellas -a leader in elaborated meat products and fresh pizza- was the only key supplier able to work in both kind of products, combining Hacendado for Mercadona with their namesake brand.
The inter-suppliers willing to give this step into the branded world will have to deal with a quite extensive transformation agenda:
Defining consumption trends and needs that they want to cover; a process in which they will lack the research support that their main client used to provide them, based on the famous co-innovation labs with thousands of consumers bringing plenty of insights.
Designing a brand platform enhancing the personality and differentiation attributes needed for success, powered by an omni-channel communication plan ensuring the awareness of their value proposal.
Activating the point of sales with attractive actions and product expositions, jointly with a promotional plan which is a pre-requisite in a majority of Spanish retailers - and a key difference with Mercadona’s EDLP model.
Defining a pricing policy for positioning properly in front of leading brands and other private labels, as well as for covering the investments needed in innovation and in-store presence.
Having a look at all these requisites, it sounds that only a selected group of inter-suppliers will be able to deal with them. Those who really try will need to capture human talent in order to develop the required capabilities, so we can predict interesting moves between corporations, especially in sales and marketing positions.
Being realistic, we can also imagine that some companies will keep into a much more tactical profile, with a reduced investment. They will introduce low-price brands, which will probably lead to blur their mainstream business.
Developing the alternative channels
Looking ahead of the impact of Mercadona’s new supply policy in the Spanish retail, the inter-suppliers are also exploring other opportunities, like the diversification to new markets.
This is not really a new topic, as these providers were already allowed to look for alternative customers, as soon as they didn’t compete directly with their main client. We are talking mainly about industrial/B2B, international, and food service; let’s share some examples, all based -same as the following chapter- on public information:
· SPB (Suavizantes y Plásticos Bituminosos) is one of the main providers in home cleaning -completed with fabric and personal care-, and dedicates 90% of the production to its key account. Nevertheless, in 2013 the owners’ family decided to spin-off the subsidiary called Cleanity, specialised in industrial cleaning and hygiene, awarding it with a full autonomy to expand.
· Prosol (Productos Solubles) supplies instant and portioned coffee and was born in 2001, with the exclusive mission of serving Mercadona. In recent years they have understood the need to go abroad, and have gained contracts in Portugal, France, Germany, Sweden, Denmark, Maghreb and Eastern Europe. This has reduced the dependence towards their main client, who accounted for 55% of sales in 2018.
· Congalsa in a leading company in frozen appetizers and “tapas” based on seafood, producing Hacendado for Mercadona. This is complemented with a strong position in on-trade and food service, which are managed under the brand Ibercook, posting 31% sales penetration at 2018 closing.
There is no doubt that these diversification initiatives will be boosted in the short term. For example, the on-trade market has a wide potential and interesting growth perspectives. Probably, the inter-suppliers willing to address it will attack the organised channel before overseeing the independents outlets, which require highly specialised route-to-market capabilities due to the tremendous atomization of the Spanish landscape.
Alliances for international growth
Most of Mercadona’s traditional suppliers are perfectly prepared at industrial level to attend the most demanding RFP’s coming from retailers, and for sure they will try to compete in these kind of processes at international scale.
Nevertheless, this could be not enough to face the consolidation process that is spanning into the private label market at European level. The increasing sophistication and segmentation of consumer needs, jointly with food safety requirements which are becoming more and more demanding, are driving the need for developing stronger R&D resources. Economies of scale are also becoming a key success factor, as price keeps being a pre-requisite for retailers when they are purchasing their own brands.
Companies who have passed through the “Mercadona school” can hold a first-class position into the concentration trend which has already started. This is also in the radar of private equity funds, who ambition to lead build-up processes at European level. Let’s see some cases:
Bynsa Mascotas, who was born through a management buy-in in 2007, is the key supplier of dry food for dogs and cats. In July 2018 it was integrated into the Belgian company United Petfood, and together they form a Tier-1 private label conglomerate in a high-growth category.
GAC (Grupo Alimentario Citrus), the preferred provider for prepared salads and vegetables, is growing through acquisitions: after buying two plants to Agrial group (the owner of Florette) in Switzerland and Italy, they have also invested in the German company Thürlander, another specialist in ready-to-eat solutions. Both operations reinforce their capacity to serve the key accounts with the adjusted lead times required by this kind of products. GAC has tripled its international revenue, which represented 27% of sales in 2018.
In 2018 also, the family-owned company Ibersnacks joined forces with Europe Snacks and Kolak to lead the private label and third-party supply of snacks and chips in France, UK and Spain. The operation was led by Apax Partners, shareholder of Europe Snacks since 2013.
Grupo Siro announced at the end of 2018 the integration of Cerealto, a former spin-off with shared family ownership, which had been segregated some years before to run the business out of Spain. The unified group is currently selling its pastries and bread industrial assets, in order to focus in three categories: biscuits, cereals and pasta. They ambition to convert into a key player in the B2B and private label market, working with a portfolio of 30 international customers.
The most recent operation -at the moment in which we publish this article- has been led by the already mentioned Casa Tarradellas. They have surprised the market, being the company selected by Nestlé to sell their meat branch Herta, which will be managed through a 60-40 joint venture holding leadership positions in Spain, France, Germany, Belgium and UK.
The new “rules of the game” that Mercadona has established through diversifying its supply network, suddenly put under the focus 120 top-class private label companies. At a domestic level, this is triggering an intense commercial activity, thanks to the disclosure between two industrial ecosystems whose lives were running in parallel, with almost no interaction: Mercadona’s providers versus the “rest of the world”.
This process is also impacting abroad the Spanish market, as the former inter-suppliers have numerous arguments to be key actors in the concentration process that the private label market is living in Europe. During the next months we will see new corporate M&A’s that will confirm the “revolution” that this sector, which is so important for the Spanish industry, is experiencing.