Steinhoff on an acquisition spree

We haven’t seen such a spate of corporate activity in retailing for many years. Since the last time the stock markets were getting a little “toppy”, in fact.

It looked as if we were about to have contested bids for both Darty (France) and Argos (UK). Fnac and Sainsbury’s started off both auctions and Steinhoff was on the other side of both. In the event, Steinhoff dropped out of the Home Retail bidding process, allowing the Sainsbury’s bid to stand on its original terms. But at the same time, Steinhoff struck a deal with Darty with an increased bid which the Darty board then recommended to its shareholders. Fnac could still come back with a counter bid, if it wanted to.

We discussed Steinhoff in an Analyst Insight last November (Steinhoff expands to become the second largest furniture retailer in Europe) when it completed the acquisition of Lutz and Pepkor. Arguably the latter was the more important because it brought the South African entrepreneur Christo Wiese in as a minority shareholder. The corporate activity that has followed suggests that he is not just an investor but is directing the strategy of the group as well.


There’s a good case to be made for both of the bids from Steinhoff’s point of view. In fact we think the Steinhoff case stacked up better than the rival bids. But it probably realised that it was in no position to fight two takeover battles at the same time and would be hard pressed to integrate both if they were successful.


Given the choice of which bid to pursue, the Darty option makes more sense to us. Argos may have a big furniture business, which would fit well with its existing furniture businesses (Harveys and Bensons) but we have doubts about the format itself. We are not aware of another business like Argos anywhere in the world. Few have even tried to develop one. (Kijkshop which has 91 outlets in the Netherlands is similar.) It seems to us that Argos has all the problems of operating stores, but too few of the benefits. In addition, at the moment Argos has too much space and needs to downsize.


There’s no doubt that Fnac is fully aware of the problems that face its core business. Books, music, DVDs, games are all migrating online and the delivery is often online as well. We are less convinced that Darty, the largest specialist electricals retailer in France, is the solution to those problems. The future of electricals retailing will be through the combination of electrical hardware and connectivity. Fnac recognises that, but it is hamstrung by the sheer scale of its city centre property portfolio and its bias towards cultural goods. It is a classic example of thinking “I know where I want to get to, but I wouldn’t start from here”. Darty would be better off being able to make those developments itself rather than as part of Fnac.

The Steinhoff bid brings Darty together with Conforama, a large part of whose business comes through electricals. Here the fit seems better. Darty would be able to continue to develop in line with the market, while being able to support and develop the electricals side of Conforama as well.

Steinhoff’s core expertise in Europe is furniture retailing. Buying Darty would strengthen the side of Conforama that Steinhoff knows less about.

And Steinhoff?

Furniture is the core of the Steinhoff business. That is what it knows most about. Neither Darty nor Argos is a perfect fit in that respect. But the Pepkor deal has taken the group into discounting as well as a number of other businesses from shoe retailing to clothing retailing. Steinhoff is already the holding company for a wide, disparate collection of retail businesses, which have too little in common.

Experience suggests that such conglomerates do not work and that in the longer term Steinhoff will need to embark on a process of rationalisation.

Real – Rumours of a sale surface again

Metro is a classic retail conglomerate developed on the strength of the Metro cash & carry business in the 1980s and 1990s. But it did not work and as early as 1998 the group was taking steps to rationalise the group. Divestments have continued, the latest being of Kaufhof to Hudsons Bay in autumn 2015.

That left the group with three businesses. Two are performing well – Metro cash & carry and Media Saturn, the European market leader in electricals. But the third has been a problem for many years and we are sure that Metro has tried to find a way out of it but, so far, it has failed. The third is the hypermarket business Real. It used to also have a supermarket chain, Extra, but that has been closed.

Real – A long term underperformer

But why is it that Real has struggled when hypermarkets have been so successful elsewhere in Europe?

A good start is to look at how the market breaks down. The following chart is based on one in Mintel’s report, Supermarkets – Germany, November 2015.

Figure 1: Germany: Leading players: Share of food retailers sales, 2014
[graphic: image 1]
Source: Companies/Statistisches Bundesamt/Mintel

Hard discounter dominance

This breakdown is unlike any other in Europe and that is best illustrated by putting these major players into broad categories. (We have allocated other smaller food retailers that we have identified for the European Retail Rankings into the relevant sectors):

Figure 2: Germany: Food retailers by broad category, 2014
[graphic: image 2]
Source: Companies/Statistisches Bundesamt/Mintel

The key factor is the share of the hard discounters at around a third of all food retailers’ sales (35% excluding the food specialists). There are two key implications of that:

  • The natural complementary formats of the hard discounter are the small supermarket and the food specialist. Those two can provide the vast majority of top-up shopping needs, not satisfied by the hard discounters

  • There is much less need for a superstore than in other markets. The hard discounters cream the high volume fast moving goods and small supermarkets provide most of the rest that is needed.

But there is one successful superstore business – Kaufland. It is part of the Schwarz Group, alongside Lidl. Low prices and a low cost base are central and unlike Lidl it has a higher proportion of branded goods and it uses its own logo (“K”) for its own brands.

Where next?

In such circumstances it is hardly surprising that Real, which is a hypermarket more in the style that we are familiar with in France, struggles to survive. And it is hardly surprising that Metro is finding it hard to find a buyer for it. Perhaps the answer is to try to persuade Kaufland to take the stores and absorb them into its business.

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