Germany Edeka Joins Dairy Co-operative
Edeka is to become a member of dairy producer co-operative AMK, Lebensmittel Zeitung reports. This means that the German market leader is further driving verticalisation, adding to its own meat production, winery, co-operation in bakery goods, fully integrated solution in juice production and investments in a mineral water plant.
According to anonymous sources quoted by LZ, it is understood that Edeka will be anything but a silent member in the co-operative and it is already using the move to put pressure on dairy suppliers in the current round of price negotiations.
Denise Klug (Senior Retail Analyst)
Opinion A Careful but Savvy Move
Edeka is pushing verticalisation and in doing so it is in good company. Retailers such as Swiss Migros and Coop have owned various manufacturing plants for decades and are among the largest producers in their home market. In France, Intermarché is not only the second largest store-owner co-operative but also operates 62 production sites to secure supply, control produce and private label costs. Colruyt Group’s Fine Food department comprises various manufacturing facilities from coffee to meat and bread. Instore, most of these items display prominent labels – not only because the Belgian market leader is proud of its various skills and broad expertise but also as exclusive items with a reasonable quality-price ratio can help to create a USP. And of course, Europe’s Number One in terms of sales, Schwarz Group, is also striving for more independence from suppliers. Schwarz is currently busy building its own ice cream factory that would – according to LZ - reduce ice cream sales of one of the largest dairy companies by two thirds.
It goes without saying that Edeka sees verticalisation as a viable way to decrease its dependence on only few suppliers in consolidated product markets, especially where commodity prices are increasingly volatile. However, a strong push in that direction does not come entirely without risks. Intermarché for instance is understood to have had long-term difficulties, as the cost of maintaining production facilities has been a heavy burden. When retailers enter into manufacturing and production, they acquire another field to focus on which might also reduce the focus and investment they can give to their key area: the store networks. Additionally, not all retailers are yet experts in this segment, which means they first have to carefully learn how to best integrate the new pillar into their business and leverage synergies. Opportunities to sell to competing retailers in the very same market are limited if not non-existent. This means exports to other markets become necessary in case of overproduction or expansion efforts.
The fact that Edeka is becoming a member of the co-operative instead of acquiring or building its own production facility reduces the aforementioned risks and responsibility Edeka would have to take over while still providing it with the ability for strong negotiation. According to industry insiders quoted by LZ, Edeka is already making use of its membership in the current round of price and contract negotiations. Edeka is said to support the relatively small company to put pressure on the big dairy suppliers. Pushing verticalisation in general will help the German grocer to directly have influence on the speed of product innovation at a time where discounters are becoming more like supermarkets and private labels not only becoming more niche but also more ephemeral than ever before.