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S Group Exits Latvia and Lithuania

The Finnish grocery leader S Group has decided to close its Prisma hypermarkets in Latvia and Lithuania. SOK Consumer Goods Executive Vice President, Jorma Vehviläinen said the market share is not large enough in either country for operations to be profitable and that organic growth would be very challenging going forward. He also referred to the fact that competitors have invested heavily in both markets in recent years.

The three stores in Latvia and four in Lithuania will be closed in June and the rented plots returned to the landlords. This leaves the retailer with the overseas markets of Estonia where it has eight hypermarkets and St. Petersburg (Russia) where it operates ten supermarkets and six hypermarkets. S Group claims it wants to increase its market share in both of those countries.


Opinion

Store Expansion Too Hesitant

The competition for Prisma has indeed intensified in the last two years. Most notably, according to LZ Retailytics numbers, Ica Gruppen 2014-2016 opened seven hypermarkets in Latvia and eight in Lithuania. Considering the small sizes of the Baltic markets and the limited space for big boxes this was a sudden and perhaps unexpected loss of potential catchment areas for S Group. Especially, as the Finnish retailer itself lost two stores in Latvia due to a non-renewed rental agreement in one of them and authority prohibition to resume trade in the other.

The Lithuanian exit makes even more sense, considering Schwarz Group’s entry in 2016. Prisma which aims to provide the lowest prices in all its markets would have to keep matching the discounter’s prices in the country, eroding the bottom line further. Ica Gruppen’s bid for the second largest grocer Iki, and its resulting increased economies of scale in the region most likely also plays a role in S Group’s decision to leave.

Discontinuing operations in Latvia and Lithuania will allow the retailer to focus on its home market of Finland. There, its main competitor Kesko is investing heavily, also bolstered by divesting of overseas markets and non-core businesses.

In Estonia, S Group already operates eight large hypermarkets and is the second placed retailer in the channel after Ica Gruppen as LZ Retailytics figures show. The country also has strong ties to Finland both geographically and culturally, which increases synergies to S Group’s home market. We forecast that Prisma will be able to reach Estonian hypermarket channel leadership in 2019 through organic growth and modest store network expansion. With this in mind, we think it makes sense to stay in Estonia.
Topics: S Group