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    European Grocers Face a Tough 2009: Report

    Falling oil and raw material prices will stymie sales, particularly of organics and nonfoods.

    A new report from Verdict Research, part of the Datamonitor Group, a London-based business information company, has found that falling oil and raw material prices, in combination with the discounter threat, will result in a significant easing in grocery prices in Europe in 2009, but that doesn't mean that food retailers on the continent will find this year smooth sailing. The research also pinpoints six main areas of grocery retailing that will be negatively affected by the economic downturn.

    For instance, the credit crisis has subdued many grocers' plans for mergers and acquisitions, format diversification, and international expansion and has stalled sales and leaseback deals, while the recession and financial crisis have slowed sales of nonfood product lines and organic items.

    2008 was a good year for European grocers, with most growth driven by inflation due to exceptionally high oil prices and agricultural raw material price increases, but both trends have now reversed. Adding to the downward direction of prices are discounters such as Aldi and Lidl, and the influence they exert on price.

    While price reductions will depend on currency fluctuations, the competitive landscape in various EU countries, the different time lags involved in food production and the behavior of manufacturers and suppliers, Verdict Research said that plummeting oil and raw material prices, together with the threat posed by discounters, will cause lower prices in grocery across the EU in 2009.

    "While grocers are to a certain extent insulated against the downturn that is severely hurting the rest of the retail sector, the effects of the credit crunch and the onset of the global recession will still be felt across the European grocery market," observed Daniel Lucht, European retail analyst at Verdict research and co-author of the report. "Real estate bubbles have burst, credit availability is curbed and unemployment is rising again. As a result customers have become cautious. The result has been an overriding focus on value from a consumer's point of view."

    Despite the bleak outlook, Verdict Research said that opportunities still exist in the market, particularly in private label development, streamlining buying and supply chains, cost cutting, lateral diversification, and green retailing. According to the report organics will be one of the first sectors to regain momentum as the recession recedes.

    Noted report co-author Simon Chinn, "Retailers with the necessary financial muscle should not let this crisis go to waste without emerging far stronger from it." This holds particularly true for such privately owned grocers as Rewe, Auchan and E. Lerclerc, which don't experience the same kind of pressure from investors that publicly listed retailers endure. Raising capital could prove daunting for even players of that stature, however.

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