Shrinking Giant

Real gets real about online shopping

Supermarkt
A supermarket with a view: The Real chain's pilot project, a modern market hall, in North Rhine-Westphalia. Source: DPA

For a while, business at the Real supermarket chain has heading one way: down. Ten years ago, Real had 349 stores in Germany. Today it has only 282. Any international activities have been discontinued and fresh store closures are already scheduled in Mainz and Bremen.

This decline is reflected in the financial results of Real, a unit of retailing conglomerate Metro. In the last two fiscal years alone, Real’s turnover fell by €1 billion ($1.18 billion) to less than €7.5 billion, and the company has undergone rounds of cost-cutting programs.

But now, managers on the offensive. Following the model of a flagship shop in Krefeld, 30 Real stores are to be converted into chic modern market halls, and other outlets are expanding their fresh produce departments. “It is quite possible that we will be opening up a completely new Real store in the future,” Real’s boss, Patrick Müller-Sarmiento, told Handelsblatt. The company is ready to invest €1 billion in the new upscale shops.

Most importantly, Real will launch a delivery service for fresh groceries and hopes this will outshine the country’s leader in online retailing, Amazon. A first test is already underway in Dusseldorf and the chain is delivering leafy greens and more in ten further cities from Berlin, Hanover and Dortmund to Bergen on the Baltic Sea island of Rügen.

If it sounds very ambitious, that’s because it is. For example, Amazon only delivers fresh groceries in Berlin and Hamburg and Kaufland is confined to Berlin.

Henning Gieseke, who heads Real’s management team together with Mr. Müller-Sarmiento, said the company wants to supply several million households nationwide. The delivery region will eventually include areas around Berlin and from Hamburg to Munich via North Rhine-Westphalia and Baden-Württemberg, a potential customer base of around 16 million households.

If it sounds very ambitious, that’s because it is. For example, Amazon only delivers fresh groceries via its Amazon Fresh service in Berlin and Hamburg. Retail chain Kaufland is confining itself to Berlin and has just suspended plans for Hamburg. Edeka supplies Munich and Berlin through its Bringmeister subsidiary. Among the major retailers, only Rewe offers a nearly nationwide network of stores that deliver to 70 cities. However, Rewe has omitted the Ruhr area from its plans so far, enabling rival Real to go there without competition.

Delivery costs vary. Real sets the minimum order at €40 and charges €5.95 per delivery with the price dropping gradually with higher order values; delivery is free for orders of €110 or more. Users of Amazon Fresh have to become Prime members for €69 per year and pays another €9.99 per month for Fresh. After that all deliveries are free.

Real-Pilotmarkt
Ambitious plans: Real chief Patrick Müller-Sarmiento says since his company bought in Hitmeister, they've become one of the fastest-growing online platforms in Germany. Source: DPA

But so far, no one is making money with delivery services. To keep costs as low as possible, Real, like Amazon, is using DHL to deliver its groceries instead of establishing its own fleet of trucks and drivers. That will help the company make a profit on the service, according to Mr. Gieseke.

In addition, instead of building a new warehouse for its online service, Real is sending deliverers to its stores to fill orders. That makes more productive use of most supermarkets’ extensive floor space.

Only about 1 percent of groceries sold in Germany are sold online today, but the potential is enormous. According to an analysis by Oliver Wyman, Amazon’s entry into grocery retailing alone is likely to shift between €6 and €8 billion in annual sales volumes to the internet. The consultancy estimates this could mean 15 percent of supermarkets lose money and put 40,000 jobs at risk in the bricks-and-mortar retail sector.

Real doesn’t want to wait for that to happen. “If e-commerce reaches a 5 percent share of the total market and we are not in the game, we might lose €200 million in sales,” Mr. Giesecke said.

Last year, Real laid the technical foundation for its new digital business by buying online marketplace Hitmeister. This not only gave the retailer important developer know-how but Hitmeister also turned the supermarket chain’s online presence, real.de, into a platform used by thousands of external retailers. According to company information, real.de’s sales have increased by 180 percent this year. Though Mr. Müller-Sarmiento was unwilling to confirm this, he did say that, “since we integrated Hitmeister, we are now one of the fastest growing platforms in Germany.” Real also wants to use its e-commerce connection to reach customers who do not live near a Real market, he noted.

But before Real’s managers can make their dreams come true, they will have to come to terms with the Verdi labor union. A collective agreement with the union, which helps Real make significant savings in personnel costs, expires next March. Without a new agreement, the company will have to return to the original, regional collective agreement, spelling additional annual costs of at least €50 million. These personnel costs make the company less competitive and would make it tougher to invest, Mr. Gieseke said.

According to Real’s calculations, the company’s personnel costs are 30 percent higher than those of rivals, which translates into a cost disadvantage of around €300 million per year. However, labor representatives point out that competitors like Kaufland and the centrally managed Rewe supermarkets pay union wages and they are online too.

Right now, an agreement seems far away, though Real managers say reducing personnel costs is a crucial for further investment.

Florian Kolf covers the retail, consumer goods, luxury and fashion markets.  To contact the author: kolf@handelsblatt.com

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!