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"Spain: "Mercadona's pricing policy threatens other chains"

Competition is becoming fiercer in the food distribution sector in Spain, according to the risk rating agency Moody's. In its analysis, it warns that Mercadona's pricing and store policy threatens other supermarket chains.

Moody's analysis suggests that Mercadona's strategy caused one of its rivals, DIA, to sacrifice part of its profit margins, reducing its prices in the second half of 2017 to be able to maintain its sales level.

This competition "will have a negative impact on the credit rating of DIA and other companies operating in the country, since the chains that are losing market share, such as Auchan (Alcampo) and Eroski, may also cut their prices to be able to keep their position, thus undermining their profit margins," explains analyst Vincent Gusdorf.

In fact, DIA's management acknowledged that they adopted these measures to be able to maintain their sales after detecting a loss in competitiveness in the first half of the year compared to other firms in the sector.

Mercadona has a 24.1% market share
Moody's recalled that in early 2017, Mercadona "launched a large scale store renovation scheme and lowered its prices;" a strategy with which it managed to increased it market share by 1.2 points, reaching 24.1% of the total, according to the data collected by the consultant Kantar Worldpanel.

In contrast, "Auchan, DIA and Eroski together fell by 0.7 points," although in the case of DIA, part of this setback was due to "the closing of stores with poor results."

Gusdorf stresses that DIA plans to renovate 880 stores during the first six months of 2018 and will reopen some premises, which should help raise its revenues in the second part of the year.

"For Auchan and Carrefour, the impact of competition will be even greater due to the continued decline of the hypermarket format," he added, predicting that the latter could also lower its prices.

Spain, more profitable than other European markets
In any case, the British agency claims that the Spanish market "will continue to be more profitable than others in Western Europe" thanks to the context of economic growth and the "limited expansion" of food e-commerce.

"Although on-line sales are increasing, we expect them to barely represent 2% of total sales in Spain by 2018; a much lower percentage than in the UK or France."

"This is positive for the credit rating, since food sales on the internet are not yet profitable for many operators," he concluded.


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