Jeronimo Martins: When the going gets tough... Biedronka powers ahead

Research evidence excerpt

Jeronimo Martins: When the going gets tough... Biedronka powers ahead

tlook for food deflation in Poland. Deflation in Poland has 3 major drivers. The first is

supplier deflation/negative PPI, particularly in categories like meat (especially pork) and dairy. Secondly, the Polish consumer

is highly price sensitive/promotion driven, although this is not driven by weak incomes (savings are increasing) but by weak

consumer confidence. Finally, there is still an intense competitive situation. Many players are using promotions to drive

volumes to compensate deflation. At Q1, Jeronimo expected that the cost pressure would turn in H2, but this now looks less

likely. Jeronimo expects the situation will still be difficult in Q3 but might be easier in Q4, and also noted that the comps get

easier from September onwards. Jeronimo also acknowledged that even if PPI does turn positive, given the competitive

environment, it likely wouldn’t drive deflation down immediately.

• The drivers of Biedronka LFL in Q2 were -6% basket deflation and volumes +>4%. It also suffered from a negative

calendar effect >1%. Biedronka gained some market share in H1, particularly towards the end of the period. Looking to H2,

management wouldn’t assume negative LFL for Biedronka as a base scenario, although does expect the situation to remain

tough with the deflationary pressures.

• Management expects some, but not all, of the Q2 margin strength can continue into H2. Sustainable drivers of margin

expansion in Q2 were: cost management, efficiency (e.g. work on the layout of stores), normalization of the costs associated

with the DRS system, volume growth and mix (helped by targeted promotions). More one-off elements include some

seasonal effects (e.g. lack of higher costs during peak sales in Easter).