<B>Clearance sale sweeps across Germany</B>

By Stefanie Müller, Wirtschaftswoche correspondent in Madrid

19 February 2003

There is a generalized crisis in the German retail sector. Only discounters are doing land-office business. German consumers are taking their revenge out on Euro-criminals

A nation of swindlers and pfennig hagglers – that’s what will go down in the history books, when they write about the start of the 21st century in Germany. For never was the German population as price-conscious as it was in 2002. Above all, you can blame the introduction of the euro at the start of the year. “I simply feel I’ve been swindled when I see how they carried out the conversion,” complains one man from Cologne. It appears that many shopkeepers carried out a straight 1:1 conversion of their prices. This deception was not easily noticed a first, as many Germans also found themselves converting prices on a 1:1 basis, instead of 2:1.

Now, however, with their country wracked by a crisis and less cash in their pockets, German citizens have discovered how to get their own back: they simply stop buying in those establishments where they were so shamelessly deceived. For traditional retail outlets, among the greatest fraudsters of all, this has led to the most severe crisis since the Second World War, whereas discounters (as discount outlets are known) have been making a killing. The latter watched gleefully as their market share rose 3.5 percent over the last year, coming close to 40 percent. Most converted their prices fairly and consumers continue placing their trust in them.

And this despite the fact that, in no-frills outlets like these, half the items on sale are actually on the floor, due to staff shortages. Rummage stalls do their name proud; nobody is on hand to offer advice, and self-service is the order of the day. Cash only is the norm at the checkout stands and plastic bags, though they always rip apart, are no longer free.

In no other European country are discount stores so much in demand as in Germany. In the grocery sector, traditional stores face fierce competition from discounters such as Aldi, Lidl and Plus, who are already operating in Spain, albeit with significantly lesser success. In southern Europe, convenience comes before price. Given that German stores have no delivery service and are generally situated outside towns, they have fewer fans here. Also successful in Germany, though to a lesser extent, are the Penny and Netto outlets.

“The future of the grocery store is the discount outlet,” declares Volker Koch, of market research consultancy M+M Eurodata. It is estimated that by 2007 their sales will have soared by up to 75 percent - most noteworthy being the figures for Aldi, inventor of the discount grocery store. Experts in this sector reckon that by 2004 discount retailers will see their income rise from the current € 45.8 billion to over € 50 billion. According to market studies, each year sees the opening of 300 new outlets in Germany alone. This means that manufacturers are going to try harder than ever to ensure a presence on these shelves, even if it is only with their commercial brand names. This gives discounters a tremendous opportunity to negotiate prices and thus increase profit margins even further. All other retail formats – department stores, supermarkets or hypermarkets - are doomed to fight for a smaller market share.

Although Penny and Plus were practically bankrupt a few years ago, they are now flourishing - not just within Germany, but also in other European countries. Price-conscious shopping has become more fashionable than ever; not even the upper-middle classes want to pay one pfennig more for the same quality. As they know that major manufacturers sell their products under other brand names in Aldi and other shops, they are fond of saying that those who want to pay the full price must be stupid.

While traditional retail formats place great emphasis on customer service and established brand names, discounters rely most of all on good value for money. To this end, they are constantly increasing their range of own-brand products, which are often better received by consumers than established brands. Moreover, when it comes to advertising, discounters act differently from their more expensive competitors, and often much more effectively. Weekly specials are offered at price-dumping levels (below market price) in full-page advertisements, preferably in the local press.

Through spectacular one-time offers on non-food articles, Aldi, for example, regularly showcases computer products at ridiculously low prices. This is far and away the best publicity for discount outlets, and for Aldi represents one-fifth of its total sales volume. Plus sells its low-priced products on the Internet, and as a result of its success in this sector has gone beyond grocery items, now selling prefabricated homes from € 99,900, mobile homes for € 2,975 and even holidays. It is now possible to buy cars at dumping prices in subsidiaries of grocery retail giant Tengelmann.

Brand representatives and specialized outlets have been caught off-balance by this boom in discount brands. They strive whenever possible to discredit the methods of discounters, who, in their opinion, offer less quality and service. Brand representatives also have their problems. “This growth pattern has totally passed us by,” notes Klaus Schumann, director of Procter & Gamble, Germany. “We can barely get our brands into that kind of outlet.” Discount chains are producing an ever-increasing number of their own articles and others are manufactured exclusively for them. As a result, the major players can only gain access to Aldi and the others using different brand names.

Grocery stores contemplate with despair the discounters’ intention the to enter the fresh food sector, until now reserved for supermarkets. With the exception of Spain, they watch helplessly while their market share progressively shrinks. Not even the meat sector is off limits. In 2003, Aldi and Lidl plan to introduce prepacked meat products, including steaks, chops and goulash. This could spell disaster for butchers, who have still not recovered from the mad-cow crisis, and drive their market share ever lower.

But discount fever has reached into other sectors, such as the Strauss-Innovation textile chain, whose products have become cult fashion accessories in recent years, or the Media Markt chain of electrical appliances outlets. Strauss’ sales growth rate percentage has reached double figures. The secret of the Dusseldorf-based chain is to copy fashion articles straight from Paris catwalks and offer them at bargain prices. “Customers take a first glance at the price and think they must have read it wrong,” says shop owner Peter Geringhoff. And this is precisely what appeals to German bargain hunters, who frequently purchase articles simply because they are so cheap.

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