Pedro Soares dos Santos
Message from the Chairman
In fact, it was my first year in office as Chairman of the Board of Directors of the Group, whilst at the same time carrying out the role of Chief Executive Office, which was not only a new and challenging experience but a huge opportunity for learning and personal growth, for which I am grateful to the other members of the Board for all their support.
However, this individual circumstance was far from being the only piece of news or the most relevant one. The strong deflation that hit the European economy, which was higher than we expected, did not spare Portugal, or even Poland, which experienced food deflation for the first time since we started our activities in the country, aggravated by the effects on food exports as a result of the crisis in the Ukraine and the heightened tension between the European Union and Russia.
Food deflation hit the Polish economy (-0.9% as an average for the year), and our sector, following more than two years of inflation slowdown. This inevitably generated a dangerous combination: a drop in the value of sales (with volumes posting growth), cost inflation (namely electricity and salaries) and a highly competitive environment. In other words, margins were under severe pressure.
Nevertheless, in an economy which continues growing, where the unemployment rate is on a downward trend and salaries are increasing every year, with deflation and highly competitive market dynamics, the consumer has an increasing amount of available income and private consumption will continue to rise. This means that the growth potential that we see in the Polish market remains intact.
In order to capture that potential, Biedronka’s priority has always been fast and efficient expansion. That is how we have added over 700 stores to the chain, in the last three years alone (2012-2014). In 2014, we opened 211 Biedronka stores (2.587 at 31 December) and three new Distribution Centres, which enabled us to close the year with a total of 15 logistics regions.
Having reached a solid dimension, we can now focus primarily on total, like-for-like sales growth, rather than on increasing the sales area, which will continue to increase naturally, as we get closer to our target of 3.000 stores, even if we move at a different pace (between 2015 and 2017 we will open, at least, another 300 stores).
We want to take the maximum advantage of our current store network, which means investing in the overall improvement to our offer, whilst at the same time investing in reinforcing Biedronka’s price leadership in the Polish market, where discount stores continue to be Food Retail’s major growth driver.
We are well aware that we can never compromise our chain’s price positioning, but we also know that, in Poland today, price alone is not enough to win consumer preference and loyalty.
From the assortment to the overall shopping experience, we must bring more innovation and ensure that Biedronka remains important and attractive to the over 1.250 million visitors to its stores every year. In order to ensure that it continues, to lead in market share gains in the future, as it was in 2014.
We shall not disrupt with our current store format or our business model, as they are both still perfectly valid. We have invested more than three billion euros since 1995, in building a high quality infrastructure network and a strong and extensive nationwide presence, which we shall continue to reinforce with new openings, increasingly concentrated in the major Polish cities where we still have many growth opportunities.
As such, we need to guarantee the best locations and make an overall upgrade to our value proposition, whilst reinforcing the cost discipline which enables us to remain at the forefront of price leadership.
Biedronka will continue to be the top priority for the Group in terms of investment, which for that company, will amount to a figure of around 700 to 800 million euros in the period between 2015 and 2017.
In Portugal, 2014 was a year in which the average food deflation was 1.3%, whilst being particularly relevant in the second and third quarters. This variable created an even more complex challenge for Pingo Doce and Recheio, which both had robust performances, above their respective markets.
As a result of its commercial strategy, Pingo Doce increased its sales in the year by 1.7% and achieved a like-for-like performance of 1.2% (excluding fuel), which is very positive, especially taking into account the strong promotional activity and levels of deflation. Moreover, the Company added five new stores to its network (four of them managed by third parties), and within the scope of the implementation of its logistics reorganisation plan, it inaugurated a Distribution Centre in the south of Portugal, which will enable it to gain efficiency and quality in the service it provides to the stores in the region, particularly with regard to Perishables.
In a year in which the HoReCa channel stabilized and the Traditional Retail continued to fall, Recheio’s sales volume increased by 1.5%, with food deflation being the main cause of the 0.7% decrease in sales value.
With regard to the Group’s new businesses, in 2014 Hebe focused on its internal organisation, having opened 18 stores and one Distribution Centre adapted to its needs, and had a turnover of 87 million euros. As a new Managing Director joined the Company in the second half, who has a high level of expertise in the beauty business, we expect to be able to announce some news in 2015.
In Colombia, Ara’s performance reinforces our conviction that we are looking at a solid future growth pillar for the Jerónimo Martins Group. With sales of around 66 million euros, our Colombian chain had a year of rapid learning, closing the year with 86 stores in the Coffee Belt (50 openings in 2014) and has already begun the building works for the second Distribution Centre, this time in the region of the Caribbean Coast.
In line with the Corporate Policy on Responsible Sourcing and on Supporting the Surrounding Communities, in 2014, over 95% of the Private Brand products sold in the Ara stores were produced in Colombia.
In overall terms, consolidated EBITDA came in at 733 million euros (78.2% of which was generated by Biedronka) and the Group’s sales rose by 851 million euros (+7.2% compared with 2013) to 12.7 billion euros. The sales growth was very much supported by expansion, which accounted for investments of 292 million euros (around 62% of the total for the year), and also by a like-for-like growth in volumes in all the banners.
The deterioration of the EBITDA margin – from 6.6% in 2013 to 5.8% in 2014 – reflects a combination of factors creating pressure: the demands of the market conditions, additional pressure of the strong food deflation on the economic environment, experienced last year both in Portugal and in Poland, the 58 million euros channelled into the new businesses (Hebe and Ara) and the difficulty in diluting the cost inflation, namely regarding salaries and electricity, in sales, notably in Biedronka. Consequently, net profit attributable to Jerónimo Martins fell by 21.1% to 302 million euros.
Despite objectively being a solid result, I cannot hide the fact that I believe that we will have to be able to do better in 2015, especially in Poland.
To the Jerónimo Martins shareholders, I thank them for their trust in the Group’s management and in my leadership. To our other stakeholders, I re-state our commitment to continue to grow in a responsible manner and to create value for the societies in which we do business. Keeping the focus where it will never cease to be: in providing customers with the best possible service.
Pedro Soares dos Santos
20th February, 2015