The market forces behind Spinneys Group

CEO Michael Wright has seen it all in his 23 years with the supermarket giant. He tells us who’s really to blame for high food prices.
By Andrew White
Sat 10 Jul 2010 04:00 AM

Spinneys Group CEO Michael Wright has seen it all in his 23 years with the supermarket giant. He tells us who’s really to blame for high food prices.

It’s three o’clock in the morning, and a freak rainstorm is in danger of washing a Beirut supermarket — and its contents — down the street and into the Mediterranean. Flood water is overwhelming the pumps, and in a matter of minutes the basement level of the store will be more akin to a reservoir than a retail outlet. Panicked staff and watchmen agree on one thing: it’s time to call the boss.

“I got a call and rushed down; it was chaos,” recalls Michael Wright, smiling at the memory. “The whole store was in danger of floating down the street if we didn’t get another pump working. I took a jackhammer, and smashed straight though the floor in the middle of the store, to make a hole so we could put an extra pump in. I guess you could call it micromanaging, but then who else but the boss would be prepared to jackhammer through the middle of a $12m shop?”

Jackhammer duties notwithstanding, Wright makes for an unlikely action man. But he does get results: the softly spoken Brit has spent more than 23 years with Spinneys Group, working in a wide range of roles until his appointment as CEO in 2006. Today, his avowed remit is to expand into new markets — and it’s a challenge he’s relishing.

Distinct from Spinneys Dubai, which operates stores across the UAE and was licensed to the Al Bwardi Group in 1999, Spinneys Group boasts a string of outlets across Lebanon and Egypt. It has already announced plans to open four stores in Qatar and Jordan in 2010 and 2011, while in the same period it will add seven outlets to its existing eight stores in Lebanon and Egypt.

“We’re in talks to launch in various stages in Morocco, Algeria, Tunisia, Libya, Jordan, Syria and more,” adds Wright. “We want to be present in all of the North African countries, and each one has its own challenges for their own reasons, but we are working hard on all of them.”

Through a combination of joint ventures and full ownership, the group plans to crack Gulf markets — Kuwait, Bahrain and Saudi are on the agenda — and even Iraq. “We continuously have Iraq on the table, with Erbil, but we had a false start,” says Wright, referring to a proposed development that fell through in 2008. “We have another proposal on the table which we’re evaluating, and there should be a decision in the next board meeting in July.

“We could open next year if we decide to go ahead, with a supermarket, but we have not made a decision as yet. Normally logistics and personnel and management are not an issue, but there are obvious challenges with Iraq and finding a workforce and management that are willing to take a posting there is one of the considerations.”

According to Wright, a consideration of a rather more mundane nature has also slowed Spinneys Group’s charge into uncharted territories. “Outrageous” land prices are hampering the group’s efforts to expand, and the firm is finding it tough to snap up the right real estate at the right time, even in the context of the global economic slowdown.

“Opening supermarkets and hypermarkets isn’t the challenge; we know how to do that,” he sighs. “Trying to find space for a standalone store is a real problem.

“It’s very easy to get bad sites and very difficult to get good ones, and land prices in all of the countries we are talking about are all based on maximum land development to the ‘nth’-level tower,” he continues.

“People never like to let the price go once it’s been up there. If you have no debt and no intention of selling it, then why do you care?”

If Spinneys Group does manage to persuade landowners to tie up their land for long enough for it or a third party to go to work, then the group’s expansion drive is designed to increase revenues fivefold over the next five years, and bring Spinneys Group’s total number of markets to eleven.

“This year we’ll be coming towards $400m in turnover, an increase of around 30 percent on last year, and within three years we’ll be at the $1bn mark because we have so many stores in the pipeline,” claims Wright. “We’ve got another month of the financial year to go, but both countries are profitable, and when we achieve the eleven countries [by the end of 2015], we’ll be past $2bn in turnover.”

One of those countries will be Libya, and Wright admits that the group is close to sealing a deal to open two full-sized hypermarkets in Libya by end-2012. The move will be through a tripartite joint venture involving Spinneys Group, a group of unnamed Syrian investors, and a Turkish mall developer.

“We have an arrangement on the table,” he says. “The first [hypermarket] should be open by end-2011, and the second a year after that. The deal should be signed in the next quarter.”

Such ambition comes at a high cost; the Libyan stores alone will require an investment of up to $20m. And yet Wright is adamant that Spinneys Group customers will not be paying out of their own pockets in order to fund new store openings.
“The retail commercial model is tried and tested across the world and the one person who doesn’t end up paying, the one person who ends up benefitting, is the customer,” he insists. “We invest a lot in opening, but we leverage our funding and our suppliers, and that’s where the money for investment comes from. The customers get better and better prices.”

According to Wright, indigenous populations such as those in Lebanon are extremely price and promotion conscious — “whenever a promotion finishes and in the few days before the next one starts, we see a toothmark in our sales figures,” he notes.

So why does there remain the perception among some customers in the Middle East that supermarket prices are unnaturally inflated? And if they are correct, then who’s walking away with most of their money?

“We can’t escape being remote from some of the markets we’re buying the products from,” says Wright. “However, the principal [supplier] is sitting on enormous margins and always makes money.

“There are some very large brands in the world with large distributors, and you’ll fight to death for a quarter of a percent,” he continues. “I would hate to think that any collude on price, but it’s very convenient that their price increases always happen at the same time, and price parity is maintained.

“I can assure you that on the food chain the people who have the tightest margin are the retailers, because we have a continuous price war. We want margin but we also want the best price because we’ve always got the competitive pressure that everyone else is selling 80 percent of the same ranges.”

According to Wright, each Spinneys Group store is looking at a gross margin of around eighteen percent. The retailer’s overheads are set at around thirteen percent, leaving five percent net to cover the group’s investments.

“I’m always amused in every country when they talk about price controls and retailers taking advantage, as I’ve never seen any retailer anywhere take advantage,” shrugs Wright. “You don’t have a chance because the guy next door is going to undercut you with the same product tomorrow. There’s never collusion between retailers.”

With Ramadan fast approaching, it is a particularly sensitive time for retailers who are sometimes accused of ramping up prices to take advantage of the swell in demand. Wright is scathing when reminded of government and media campaigns to stamp out alleged price fixing in the Holy Month.

“If you take Lebanon and Egypt, you have the same thing every year where the Ministry of Economy and the press say ‘Oh, the price of chicken went up’,” he says, a note of exasperation in his voice. “Price changes happen all year round, but it becomes a sensitive situation at Ramadan, because people believe it is being done to take advantage.

“It’s not the retailer, because the retailer is buying from a distributor or farm, and they put [the price] up,” Wright continues. “I’ve seen prices increase and I’ve seen prices decrease; I’ve seen a shortage of products that drives prices up, and when you get shortages at the same time as an extreme peak in demand, people think you’re taking advantage. But it’s just supply and demand.”

Of course, one way to limit the influence of suppliers is for a retail chain to produce its own goods. Spinneys Group launched its own-brand range in 2000, and although there have been “no discussions” on selling it in UAE stores, shoppers in Qatar will be offered an alternative to imported branded goods.

“Today Spinneys Group has the most successful own-brand range in the Middle East.” says Wright proudly. “It’s not part of the licensing agreement in the UAE, but you’ll see it in Qatar — any country where we operate the management of the franchise, you’ll see our own label stuff.”

The brand’s advancement should also gain a boost from the launch in a couple of months of a loyalty card, which Wright says will offer customers “direct benefits at the till”. And further down the line, the retailer is examining the feasibility of offering online shopping in Lebanon.

“So many have tried around the world, and so many have failed,” Wright cautions. “You have to be very specific and you can only manage it in small communities where it can be really worthwhile.

“We believe we can do it when we have a few more stores in certain areas — Beirut, for example - but it’s probably two years down the road,” he continues. “It will be very localised, and taken store by store.”

According to Wright the relatively slow speed of the internet in Lebanon, coupled with the fact that “trying to find a house in the first place can be a nightmare in this part of the world”, means online shopping will never form a significant component of the Spinneys Group business model.

Then again, that’s probably what he used to say about jackhammers.

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