Store visit: Russian Hard-Discounter MERE (Torgservis) in Poland

When MERE opened their first store in Germany two years ago, I was somewhat skeptical. Anyone with the slightest grasp of the German grocery market must have had an intuitive knowingness, that the no-frills retailer had not come to challenge Lidl or Aldi on their home turf. Even if the public pseudo-hype at that time suggested otherwise. The announced 100+ stores that should materialize within the first year(s) seemed like an overly optimistic Orwellian utopia. Just with slightly less technology involved. Much less. A standard store in Russia under the original banner Светофор (Svetofor = traffic light) is equipped for around 15,000 Euro. Cash desks, high racks, mesh wire baskets, shopping carts. In the slightly more luxurious store versions you can find a walk-in cooling chamber. With locations second and third tier, operating costs probably do not cause sleepless nights for the management. Consequently, also logistics do not seem to be top priority at this point, neither is reaching a critical mass quickly. For reference, the German subsidiary TS-Markt operates a network of 6 stores, with the farthest distance between two stores more than 500 km.

And no, the taciturn owners, the Shnayder family based in Krasnoyarsk in Siberia are no wannabe businessmen throwing play money into half-baked business endeavors. Their ultra-hard-discount banner has only recently made its debut into the Russian Top 10 grocers ranking. A year ago the store network comprised around 1600 objects, the estimated net revenue came close to 2 bn Euro. At a pre-crisis exchange rate (2014) that would be closer to 4 bn Euro. Not a bad achievement. Not at all.

As an ex-operations enthusiast who so far has never set a foot into one of Torgservis' stores, last weekend my curiosity gained the upper hand and I decided to make the trip to MERE's first toehold in Poland, in Cz?stochowa. There's nothing better to get the hang of a retailer's DNA than to walk the aisles and observe customers, employees and have a look at the assortment.

LOCATION

This specific store opened in a former Polish furniture shop. The round 'Forte' logo depicting a yellow elephant in a white circle is still hanging on one of the walls.

Also, the wooden paneling in the cooling chamber rather took me by surprise. Quite in contrast to the sausages, that were unceremoniously dumped into mesh wire baskets. You will notice different floor covering on the photos. This is the area that is part of the former showroom.

And this might be indicative of how MERE could benefit from the current pandemic situation and the uncertain economic outlook. Not only do consumers turn their focus back towards price, but with non-essential retailers closed down for longer periods, also lease rates are eroding. As seems the case here, non food operators will be the first to close down unprofitable locations. In addition, a former furniture store makes for an ideal handover for the discounter. I would estimate that the back office and warehouse space takes up less than 10% of the total space. Home furnishings are best sold from the showroom. The same with MERE's single-item pallets.

FLOOR PLAN

I would estimate that the sales area spans around 1000 sq m. There are more than 300 pallets on the shop floor, additionally more than 100 storage spaces on high racks (dark brown in the floor plan). Roughly one half of the assortment consists of food items, the other half comes from the near-food and non food ranges. Total assortment estimated at 600 SKUs.

ASSORTMENT

99% of the brands MERE carries I have never seen before or remember only vaguely. Olewnik for sausages and Sante for cereals are the only well-known suppliers I could identify. Have you ever heard of detergents produced by the Polish companies Marba and Kamal? They for sure are no standard (brand) suppliers at the big full assortment operators - Tesco, Auchan, Kaufland, Carrefour. And surely not at the discounters. It seems that MERE works largely with small and medium-sized producers like Roleski (sauces), Gi?ewski (sausages), Admar (sausages), Goldmak (pasta), Martik (nuts), Yabra (canned vegetables), Betex (carbonated drinks), Korkus (juices), Cymes (mineral water), Mispol (pet food), to name those I came across.

And there are also several dozen items sourced internationally. Coffee from Spain, wine from Bulgaria, salted snacks from Lithuania, detergents from Ukraine, to mention some.

One more fact worth to mention: Not one single basic item as flour, sugar, milk, butter, etc. is among the dry ranges. For Aldi and Lidl 40+ years ago this used to be a pillar of the business.

MERCHANDISING

With the exception of chilled items and liquors - and not counting different flavors - the basic principle is clear: 1 pallet - 1 SKU. Pallets and mesh wire baskets are the favorite receptacle of choice. Only home ranges such as batteries, baking paper and light bulbs, as well as dairy products are presented on shelves. Also, the predominant choice of price tag is an A4 sheet duck-taped to the rack or pallet.

What caught my eye is the rather large amount of big packs ('XXL' categories in the floor plan).

Lemonades, for instance, are sold in 3 liter-bottles.

Frozen goods as a standard weigh 1 kg.

Bulk candy and chocolates are sold exclusively in 500g bags. The same applies for dried nuts.

QUALITY & PRICING

As part of the Russian banner's strategy partly is buying items with shorter shelf life dates than the usual 2/3 of expiry date, I did some spot checks. Especially for sausages, dairy but also for canned goods. Nothing unusual here.

Regarding ingredient quality, needless to say, that you will not find any references to quality seals and labels such as organic, UTZ or Fairtrade. Neither will you be able to purchase any free-from products here. With MERE suppliers largely absent from other large retailers, quality as a base for price comparisons can provide only a vague reference. But we can check at least the promise '20% cheaper than average market price' that MERE keeps on repeating in each and every country the retailer enters.

MERE seems to hold its cheapest-price-promise when comparing the above ten items in a spot-check against own brand items of Lidl and Biedronka. In the front colum you can see the price difference of the MERE item against the cheapest of both competitors. Only for orange juice the price was noticeably higher. All three juices were made from 100% concentrate and the sugar content was comparable. For pasta and baking paper the MERE price was in between Lidl and Biedronka products. However, MERE pasta was made with 4 eggs/kg, the competitors used 2 eggs/kg, so the ingredient quality level was theoretically higher.

In the case of soft jelly, pistachios and the orange juice – which I purchased and in an act of bravery tested at home – I found that MERE products were at a noticeably lower quality level. Pistachios were smaller and the package contained more empty shells, while the soft jelly had a stronger sugar-note and seemed less consistent in its structure. However, taste is a matter of choice. I assume that when taking the time needed, you might find other products that are produced at a different quality level than those at the discount leaders in Poland. And most customers in-store seemed to talk about the price rather than studying the ingredient list in detail.

During the hour I spent in the store on Saturday afternoon, there must have been between 40 and 50 customers going through the cash zone. The number of items per basket seemed less than what I see at Lidl, comparable to Biedronka. Many customers seemed to be on foot.

Is this a sustainable concept? Hard to judge from one store at the moment. For sure more traditional customers in rural areas in Poland, Romania and several other countries in Central & Eastern Europe will see this format as a valid alternative to existing discount players. Lidl, Biedronka, Penny Market, Aldi and Netto (Salling Group) all have been developing upmarket. This evolution into the mainly unfilled niche of the supermarket segment in Central & Eastern Europe for sure has left space in the no-frills bare knuckles price-entry zone.

A year ago I would have seen the window of opportunity for MERE closing fast in this region, especially with income in rural areas accelerating. Now, in the wake of Covid-19, many consumers assess their economic future as unpredictable. The resulting back-to-basics movement might mean a bigger chance for no-frills formats than before.

Also from a supply-side MERE apparently does not have as many difficulties finding merchandise, as initially assumed by many experts. With grocery markets in the region consolidating, second-tier regional chains and mom & pop shops will eventually leave the retail scene. This will put smaller and medium-sized producers, whose volumes are too small to meet the requirements of the large retailers, under pressure.

The German organization - in the focal point due to Aldi's and Lidl's strong presence – has just brought in Russian discount veterans from Siberia to take over the lead of their operational business. So far it seems that MERE is poised to stay.

If you are interested in regular insight and analyses of the German and CEE grocery markets, I invite you to follow me here on LinkedIn or connect. I would be glad to welcome you in my network. https://www.dhirubhai.net/in/rennack/

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