Belgian retailer Colruyt Group sees its margins evaporating as a result of increasing price competition and rising costs. The retailer does gain some market share, but pays a high price for this. Its profits fell by a third, and will be even lower this year.
Under the bar
Although Colruyt Group’s revenue rose slightly in the financial year 2021-2022 (+ 1.2 %), its operating profit fell by a whopping 28,3 %. The margin drops from 5.3 % to 3.7 %: this is mainly due to the weaker performance of the group’s food chains.
Although the market share of its food chains Colruyt Lowest Prices, Okay and Spar increased slightly from 30.6 % to 30.8 %, its sales were under pressure. Colruyt lost 3 % in revenue, Okay Bio-Planet and CRU lost 8.6 %. As explanation, the retailer refers to the relaxation of the Covid measures and the increasing price and promotional pressure.
Fierce competition
Inflation is also an issue for the company. The fact that prices are now high on the consumers’ agenda again should be good news for a discounter, but the problem is that Colruyt cannot fully pass on price and cost increases because of its lowest price guarantee and strong competition. Especially Albert Heijn keeps the pressure high.
Furthermore, Colruyt is hit more than others by Belgium’s automatic wage indexation: the workforce has grown strongly and has a slightly higher seniority than that of most competitors.
Limiting price increases
There is no immediate prospect of improvement due to rising costs and declining consumer confidence. The difficult context will continue this year, while competition remains fierce. The company therefore expects the result for the current financial year to decrease even further.
However, this is no reason for Colruyt Group to adjust its strategy: the retailer sticks to its lowest price guarantee and will limit price increases as much as possible, “by thoroughly analysing requests for price increases and by consulting with suppliers.”
Long-term vision
Last week CEO Jef Colruyt gave a strategic update which already showed that the group will not deviate from its long-term vision. The retailer wants to focus more on urban customers and further develop digital services. This week, it started home deliveries in a limited number of regions. But observers remain concerned about the limited growth potential in food and the unclear strategy in non-food.
The share price has dropped to a level of more than a decade ago, the dividend will be reduced. The family shareholders are apparently prepared to make that sacrifice. What investors and employees – who, after all, often also have shares in their portfolios – think about it is another question.
