How to develop a successful strategy in a bad state of economy

How to develop a successful strategy in a bad state of economy

By Virginia F. Bodmer-Altura

We all know that Spain is debt ridden with an unemployment rate of close to 25 % and a decline of domestic retail for the last 25 months. But the supermarket chain has found ways and avenues to turn its virtue into success. We explain how and what other business could learn from this case

In 2011 Spanish supermarket chain Mercadona SA (the motto is your chain store of confidence) has employed 6500 employees, more than any other Spanish company and sales increased by 8 % and continue to rise. The company quasi copied or adapted an old German model for higher productivity, namely flexible working conditions, extensive employee training and a performance-linked bonus programme, the latter is exceptionally in Spain.

And of course, the company has another advantage, it is family controlled and has become somewhat a model to rewrite the rules for the Spanish economy.

It is noteworthy to recall that Germany had initiated a deal between corporate Germany and its employees around 10 years ago and workers accepted to work more hours for wages growing at a slower pace than the development of productivity.  As a result, labour cost fell by 1.2 % while productivity increased by 9 % between 1999 and 2006.

 In a recent report on TV a Spaniard declared: I do not own anything, all I have home, car and utilities are on credit, and he added I should have paid more attention to credit instalments but it was all that easy, a declaration of what I needed for what and usually without any pain the credit was made available by the bank. That is the consumer aspect, but also corporate earnings were boosted by inflation and therefore cost control was lax and the result, labour cost in Spain – in contrast to Germany – boosted 23 % over the above indicated timeframe. In other words if you eat more than you can pay, no matter if this takes place in politics or companies, sooner or later you are going to fail drastically. And of course, a complicated bureaucracy as it takes place in Spain, might be reflected by the fact that now the government decided on how to make the economy more competitive and alongside 43 new laws have to be introduced!

Mercadona is serving as a Spanish benchmark, but his view on the value of employees is not recent dated, because it was its policy year after year. Today the chain operates 1356 stores and counts 70000 permanent employees at the end of 2011 and in that year when the crisis was fully sent the company’s profits increased 19 % to EUR 474 million (around USD 619 million) and turnover reached ERU 17.83 billion.

At the company’s helm is Juan Roig who started the remake of Mercadona after emerging competition from international supermarkets such as Carrefour. Mercadona was once a butcher’s shop in the 1970’s in eastern Spain. Roig was an advocate of the lowest prices to compete and to find a model to distinguish the company in the market and among his models was US Wal-Mart. Roig visited stores, took note of all the unsatisfying situations such as poorly stocked shelves, manager checking employee bags for stolen items at the end of shift. He decided that temporary contacts at that time with a share of 60 % destructs morale and he curtailed this practise. Today, around 90 % of Mercadona workers have permanent, full-time contracts, whereas other big Spanish retailers have still 50 % of employees who work only part time.   

Mercadona invests around USD 6500 and four weeks of training in each new employee – whereas this is largely not common in Spain.  Employees get additional 20 hours of training annually and the Spanish government recently followed this example by granting all workers a right to 20 hours of training per year.

The Spanish supermarket chain also pays above average wages and has never made mass layoffs! I f the company achieves certain profit targets, nearly all employees receive a bonus of up to two months’ salary. For all these benevolent actions towards  its workforce, Mecadona is expecting dedication from its employees, meaning that they have sometimes to perform other work than their principal duties and this allows the company to adjust to the shoppers traffic. The staff is also trained to keep a close eye on customer needs. When a shopper is standing before a shelf an employee will typically offer help within a few seconds.

But there are also some frictions with the unions – in general they are in favour of the company’s policies – but they don’t feature that the company emphasises to pressure workers with a minor medical condition to consult a company physician instead of an independent doctor who might authorise a longer sick leave. The company states workers are free to visit any doctor and that under federal law, leave can only be approved by state health-service doctors.

All efforts to improve productivity has been leading to lower prices, for instance a reduction of 10 % in 2009 and this is paying off as Spanish shoppers have to further tighten their belts. Mercadona’s market share improved from 15 % in 2008 to 21 % presently. The company is actually evaluating an expansion to other countries such as Italy.

What lesson do we take from the example of Mercadona? We make it very short: Don’t underestimate the well being of your employees and their rewards. If you treat them according to their needs and capabilities, this will translate into competitive advantages for your (textile relevant) business, no matter in what sector of industry you are engaged. Mercadona is prospering and gains market share, whereas its greatest competitor Carrefour is suffering and sales lost in Spain only 5.4 % in the third quarter of 2012.


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