1 C
Rīga
Wednesday, April 24, 2024
No menu items!
HomeInterviewsRetail trade 2024: hyperinflation may be over, but prices will continue to...

Retail trade 2024: hyperinflation may be over, but prices will continue to rise in Estonia – Kristjan Anderson, Selver AS

Journalist’s Ain Alvela interview with Selver AS Business Accounting Manager Kristjan Anderson.

The sales volume of Estonian groceries has been on a downward trend since March 2022, turnover at current prices has not been able to show any growth since March this year, and even if the sales revenue of store chains increases, it is based on the rapid rise in food prices.

The sharp fall in sales volumes in the second half of 2022 reached the rest of the retail segments, while last year’s results will be most affected by the rapid price increases of the past two years and the decline in consumer purchasing power and confidence.

We found out how the Estonian-owned retail chain Selver, which is part of the Tallinn Kaubamaja Group AS, which also owns OÜ Kulinaaria, a manufacturer of Selver retail products, feels about the current retail market. Selver’s consolidated sales revenue for 2022 was EUR 596.2 million.

The total sales revenue of retail companies has been increasing year on year; which product groups are the main contributors?

“Sales of food products in cash terms remain on an upward trend thanks to rapid price growth, while other segments have been pushed down by a significant drop in sales volumes. For unnecessary product groups, people are postponing purchasing decisions on a daily basis. At least one product has disappeared from the purchase receipt; against the background of a price increase of about 20%, the average shopping basket has become 5% more ascetic.”

How is Selver positioning itself in the Estonian retail market?

“In 2022, a new retail chain entered the market. All the larger chains that have not opened significant new stores have only managed to grow turnover below the segment average. More than 95% of our turnover comes from food and groceries, and they can sustain financial growth. The share of wardrobe and household goods, which are generally in greater decline, is smaller in Selver customer shopping baskets. E-commerce volumes have stabilised. Of course, the peaks during the Covid outbreak are unattainable, but still, e-commerce sales are now three to four times higher than in the period before Covid-19.”

So what other goods can a retail trader still earn money from nowadays?

“In those commodity groups where growth in retail trade is sustained, this growth is only supported by the rapid increase in the price of goods. But in terms of volumes, last year retail trade as a whole will fall below 2022 level. Based on more recent data from the last ten months, non-specialised stores have grown by around +10% in financial terms last year, with sales of groceries, tobacco and alcohol predominating, while in terms of volume, this segment is more than -4% down on 2022. Sales of pharmaceuticals are the next fastest-growing sector. Fuel sales have increased in volume but fuel prices have fallen, so financially we will not be able to exceed 2022 level.”

How difficult is it to compete in the Selver segment, where the assortment has to be as big as possible, but people end up buying the same things?

“The relatively low profit margins of grocery stores suggest that they are quite expensive to run. The sector is resource-intensive in terms of operational processes, and the opening of supermarket and hypermarket-type stores requires considerable investment. In return, the trader can then offer a larger, more varied assortment and earn higher sales and a slightly higher margin.

Comparing retail chains offering food products is quite difficult. The vast majority of the stores are not comparable in concept to the discounter retail chains. The results are not quite comparable to Selver’s competitors either. We strive to offer the best assortment, in the best locations, in a comfortable and pleasant shopping environment, and with the best technological solutions. It’s true that in our shop, the customer pays a little more, but gets more for it in return.

In terms of turnover, the 20:80 rule applies, according to which about a fifth of the products generate almost 4/5 of the turnover, while the rest of the assortment helps to differentiate and create an advantage in the eyes of customers in terms of the choice of place of purchase.”

What are the biggest cost items in Selver’s budget and how have they changed over time?

“In the case of grocery stores, the biggest cost items, apart from the cost of the goods themselves, are labour, rent and administrative costs. In 2022, high energy prices made it more expensive than ever to run a grocery shop. Last year, at least, they have normalised.”

To characterise certain salaries, they are often compared with the so-called “cashier” salary, which is said to be an exceptionally low pay indicator. What is the average gross salary for a Selver cashier-customer service assistant?

“Such a comparison is not appropriate. When it comes to salaries in the retail sector, it is important to look at what is expected of the employee in return. As a general rule, the more multifunctional an employee is, the more pay he or she can earn. In the food trade, there are a large number of different processes and a large number of workers, and traders try to use their labour as efficiently as possible. Some processes can be covered by technological solutions, such as inventory management, self-service solutions, etc. What is clear is that the service worker cannot be written out of commercial processes completely. Depending on the nature of the job, a service worker at Selver can earn more than 1300 euro gross salary. At the other end of the scale are workers with reduced working capacity, whose ability to perform different job functions is low and whose earnings are not significantly above the minimum wage. The number of such workers in the company is a few dozen and it is a privilege to be able to offer them the opportunity to be active in the labour market.”

What are the principles of product selection in Selver stores; does the location of the store make a difference?

“Selver must be recognisable to customers in every corner of Estonia. Through Selver ABC, we offer a more compact home-delivery assortment, consisting of the most essential everyday groceries and essentials. The assortment of Selver depends on the format of the store. Regardless of the size of the store, they represent 95% of the most purchased products across the chain. Estonia is small, but we take regional specificities into account when designing the assortment of our stores.”

How do you manage to keep goods transport running smoothly throughout Estonia? Have some supermarket chains abandoned it as a marginal benefit?

“The online store allows Selver to be present in areas where we see no prospect of opening a physical store. As with the demographic situation, similar patterns emerge when using the online store – 2/3 of orders still come from customers in Harju County, Tartu County and Pärnu County. In the other regions, this can be counterbalanced by exceptionally strong customer loyalty. Providing an online store service is costly for food retailers and generates lower margins or even losses. It is also the most resource-intensive business segment where we are able to operate profitably in a highly competitive market.”

What has changed in the retail market here with the arrival of Lidl and its rather vigorous expansion?

“Lidl has filled an empty market niche of discounter-type stores in Estonia. Lidl has, as expected, taken market share from all market players and appears to have increased the number of visits to its various outlets to cover the daily assortment. Lidl’s impact on Selver’s stores in the immediate vicinity has been positive, with an increase in visitors, although the average basket has decreased in some stores. All in all, the opening of a Lidl store close to ours creates a symbiosis that can only benefit both Lidl and Selver.”

What is Selver’s strategy to stay competitive and win customers?

“Our goal is to be an innovative grocery store with the best selection, the best service and the most pleasant shopping environment in Estonia. Over the years, we have been reassured that we are betting on the right cards, and there are no plans to change this strategy.”

Much of the inflation that has been allowed to run rampant in Estonia can be attributed to the rise in food prices. Which goods or goods categories have been particularly affected by this price increase?

“The general rule is that a price increase of less than 5% does not have a negative impact on demand. Price rises of more than 10% lead to a reduction in volumes, which we are now clearly seeing in the shopping basket. By now, price increases have slowed and the decline in sales volumes is slowing.

Among fresh food products, one of the biggest price rises in the last two years has been in bread and pastries, fresh fish, dairy products, with the latest price rises coming in meat products and ready meals. Interestingly, one product group that has increased significantly in price is chicken eggs, where the price increase has not reduced sales. By buying promotional products, customers can bypass around half the impact of inflation on their wallets.”

How has the rise in prices affected consumer buying habits?

“Customers are visiting a wider variety of shopping locations, and sales of promotional products have increased by around 30–40% – their share of the average shopping basket has risen to around 45%. On average, there is one less item on a shopping voucher, and anything that can be put off is postponed. Consumer confidence is weak and purchasing behaviour is more pragmatic than ever.”

There is talk that the general rise in prices is increasingly driving consumers away from domestic food products – is it no longer important for the buyer where the tomato comes from, but how much the tomato costs?

“In fact, against the backdrop of all these stories about the crisis, it can be seen as a positive that demand for Estonian food products remains strong, and its share has not changed over the past three years. But the truth is that the buyer’s preference tends to be for lower price ranges and promotional products.”

How does Selver perceive consumer price sensitivity?

“Like all retailers, we are feeling the effects of this through an increased share of promotional products and a modest increase in the cost of a shopping basket due to high inflation.”

In such a situation, how does a trading company plan for the future?

“Food retailers are somewhat more optimistic about the future than industrial sellers. Growth in average wages has been outpaced by price rises, and we forecast modest sales growth this year. On the downside, we know that food has never been as expensive as it is now – in two years, food prices have risen by around 40%, and although inflation is slowing, prices remain on a high plateau.”

What do consumers need to be ready for in the near future? Will prices continue to rise?

“A moderate increase of 3–5% in food prices will persist this year.”

VAT increase from the new year – how much desire, capacity and opportunities does a retailer have to absorb the 2% increase?

“For our company, the financial impact of the VAT increase is more than 12 million euros, which we cannot absorb. We will include this in product prices in the early months of 2024. However, we can promise our customers that there will be products on the shelves that we will continue to sell this year at today’s prices.”

How will the VAT increase translate in real terms – will all goods automatically rise by 2%?

“Not all goods will become more expensive, for example alcoholic beverages will be affected by the price change together with the excise duty increase in the first quarter of the year. Selver has more than 50,000 products in its assortment, but the number of products that change price is less than 10,000.”

Why is it the case that consumers in Estonia have lost faith in promotional campaigns, where it is becoming more and more apparent that shops engage in bluffing, empty promises or outright consumer deception?

“Selver has not manipulated campaigns. Promotions have gone through a new regulation, which is not a problem for Selver to comply with.”

How would you describe Selver’s contribution to the climate goals and following the green policy?

“Selver measures its CO2 footprint. The biggest footprint comes from store refrigeration systems. New store technologies will reduce this by more than a third. The investment in upgrading stores to new technologies is high, which is why we are combining their replacement with renovation at the end of a store’s life cycle. Another big area is food wastage, which we are trying to avoid by preventing these situations.”

“Consumer confidence is weak and purchasing behaviour more pragmatic than ever,” Kristjan Anderson.

Retail trade turnover increased at the expense of price rises

 

Source: Statistics office

LEAVE A REPLY

Please enter your comment!
Please enter your name here

RELATED ARTICLES

Most Popular

Recent Comments