The FINANCIAL — Recent reports in the Georgian media on the anticipated entry of supermarket chain SPAR havecaused widespread fear among local operators.
The FINANCIAL — Recent reports in the Georgian media on the anticipated entry of supermarket chain SPAR havecaused widespread fear among local operators. The introduction of yet another international competitor would result in closures of local supermarkets on a massive scale. It is, however, the question if these fears are justified.
First of all, total retail provision in Georgia is still on a very low level and about half of all retail surface area is “traditional” retail: open markets and small “Mom & Pop” stores. This is a situation that is not much different from Central & Eastern Europe in the early 1990’s. Since then, the rapid maturation of retail markets in those countries has gradually pushed traditional retail out, leaving large international operators and brand stores to dominate the market. However, traditional retail does still exist in Central & Eastern Europe (CEE), mainly in the form of small neighbourhood grocery stores.
The Georgian retail market still has a long way to catch up with the CEE-level of retail provision, let alone Western Europe. It is estimated that in Georgia, total retail surface area (traditional and modern supply) amounts to just over 0.2 m² per inhabitant. This is about 20% of the CEE average and less than 15% of Western Europe. This is low even corrected for spending power, particularly when considering that about half of all supply in Georgia is traditional.
Second, limited competition in the supermarket business in Georgia has resulted in unrealistically high profit margins to date. In Europe, net profit margins for supermarkets range between 2-4%, pushed down during years of intensifying competition. Large international chains, such as Carrefour, Tesco and AHOLD survive thanks to massive turnover volumes that the modern business model requires. In Holland, there are regular “supermarket wars”, periods of time where the main rivals lower prices to such levels that profit margins are reduced to almost zero, aiming to push competitors out. That, of course, is a market environment which is completely alien to the Georgian situation.
More competition in the Georgian supermarket environment is a good thing: it stimulates efficiency of producers and lowers prices for consumers, benefitting the economy as a whole. As always, there will be winners and losers. In the short term, the likely winners are the large chains, but this does not necessarily mean immediate closures of small operators on a large scale.
As seen across Europe, with particular reference to markets that have gone through similar development phases, it is a gradual process of market maturation. Traditional food retailers will start to feel the pressure, but since most of these are small family businesses, they will be flexible and (in most cases) able to adjust their offer to the changing market environment. Segmentation and specialisation are key in this respect: small neighbourhood grocers will be stimulated to connect closer to the demands of their customers and will maintain their place in the local community.
The biggest threats will be faced by medium-sized locally operated chains, which are positioned in the middle, between the large international operators and small neighbourhood grocery stores. As they neither have the buying power of their large rivals nor the connection to the customer that their small competitors have, they will likely be the losers in the short term. Some of them will have to close down, but many will be transformed into chain outlets. In any case, it looks like the Georgian supermarket environment is at the brink of a historic watershed, entering a crucial phase in the process of becoming a modern, competitive market. The benefits to consumers and the economy as a whole will most certainly outweigh the losses.
MartijnKanters is an Associate at TBSC Consulting, Georgia. He was based for more than 10 years in Prague (Czech Republic) and has worked across Central & Eastern Europe on urban development, real estate and tourism.
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