Agrokor update: What will happen to Konzum and Mercator?

Date : 06 July 2017

Agrokor’s government assigned trustee, Ante Ramljak, announced an inevitable break-up of the Croatian conglomerate to pay back its debts. IGD looks at the impact of Agrokor’s restructuring on its retail operations, Konzum and Mercator, and their prospect for the remainder of 2017 and 2018.

Konzum sales decline and closures in 2017

The only indication of the retailer’s latest performance indicators was an announcement of an 11% drop in revenue for the first 5-months of 2017. The retailer’s new CEO Slank Ledic announced the closure of up to 100 stores in 2017, with 27 expected in July alone. The closures will make up to 14% of Konzum’s 700 plus stores. Konzum announced that it will report the 2016 full-year results by July-end.

Agrokor’s break up removes Konzum’s advantage

Agrokor holds a total of 26 entities that are a mix of retail, non-grocery, manufacturing, and agricultural businesses. These entities produce some of the SKUs and private label products sold on Konzum’s shelves and gives the retailer a supply chain advantage.  In the 15-months assigned to restructure Agrokor to pay its debts, these entities will be dismantled and sold off and Konzum will lose its supply chain advantage across its Balkan operations.

Mercator recovered business performance in 2017

Mercator reported a 4.5% decline in 2016 revenue as sales in Slovenia and Serbia slumped by mid-single digits, except for Montenegro. Mercator concentrated on its key propositions to its customers that helped improve 2017 year-on-year performance. Although Mercator reported a 0.7% decline – excludes sale of Intersport and Modiana - in Q1 2017 when compared to Q1 2016, the retailer registered a net profit increase of 64% to reach EUR 1.1mn. Mercator projects a 4% decline for 2017FY.

Mercator to regain Bosnia & Herzegovina (BiH) operation by Q4

Negotiation between Agrokor and the BiH government allowed for the decision to place the retail operation back under Mercator’s charge. A move considered necessary to limit layoffs and store closures, as well as pay back suppliers. No clear timetable was announced for this move as its depends on when Konzum debts with local suppliers are resolved. For Mercator, return to BiH will have a significant impact on the retailer. This will be the inclusion of around EUR 350mn of sales to make up nearly 15% of revenue in a market expected to grow at mid-single digits rates over 2017-2021. However, Mercator’s profitability in BiH will be affected since Agrokor sold the BiH logistics operation – Velpro – and lost its supply chain advantage.

Konzum/Mercator’s lead will be threatened in the Balkans but not lost

Konzum projected an improved trade during the summer period but that came to no fruition as consumers were attracted by Lidl’s price competitive offer. IGD forecast that over 2017-2021 the gap between Konzum and Lidl in Croatia will shrink by around 40% from EUR 1,258mn to EUR 771mn. In Slovenia, less so for Mercator as the gap with SPAR International narrows by 16% from EUR 652mn to EUR 550mn. Lead retailers in Serbia (Ahold Delhaize) and BiH (Bingo) will pull away from Konzum/Mercator, but the latter will hold their number rank.

Konzum is a market leader in the Balkans, and suppliers in that region are highly dependent on sales to the Croatian retailer. As a result, Konzum may struggle to turnaround performance by 2018-end as it looks to obtain consensus with its suppliers and regain their trust in invoice payment. Konzum will also lose some negotiation power, as suppliers shift sales to key competitors, such as Lidl, to maintain sales. For Mercator, the situation is less ominous since they have invested in a promotion strategy that builds on its proposition to its customers.

 

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Amin Alkhatib, Retail Analyst CEE, IGD International: based in London, UK, Amin is responsible for shaping IGD's research in Central and Eastern Europe; as well as contributing to IGD's broader European research programme. Follow me on Twitter @Amin_IGD for further insight on the region’s retail landscape.