While China continues to dominate emerging market newsflow, there remain strong opportunities in other countries in the space. One example is Dino Polska, the Polish grocery retail operator.
The Company was established in 1999 and focuses its business on “proximity” supermarkets with smaller formats. Stores have net sales areas of 200-500sqm each and offer around 5,000 products of which 90% is typically food and 98% are domestic brands.
We have owned the stock since January 2018 and in that time, it has appreciated some 220%. A recent call with management in October reiterated our investment case that despite Covid-19 impacting consumer sentiment in the short term, Dino Polska is confident of their store expansion plan, leaving it well positioned to capture the premiumisation of Polish households in the medium term.
Management highlighted that the grocery market remains fragmented with the top 5 players accounting for 52% market share (vs 60% in the UK and 73% in Germany) Discounters have been the market leaders, but Dino Polska is gaining share, from 1% in 2014 to 3% in 2019, as consumers prioritise proximity and convenience purchasing. Given their store roll out strategy, our estimates suggest Dino Polska’s market share could double in the next 5 years.
Management has a strong track record of expansion, increasing the number of stores to 1,371, beating its initial target of 1,200 stores by 2020. Dino Polska started as a regional player in the south west region of Poland and has since expanded east, with the network covering 1,000 out of the almost 2,500 municipalities in Poland (Figure 1).
Figure 1 – Dino Polska Store Network, www.grupadino.pl
This type of supermarket roll out has happened before, with the explosion of national grocery chains in the US in the 1920s. Grocery stores started out as regional operators focusing on dry goods such as canned foods. It was not until the 1920s when regional chains such as Piggly Wiggly, Kroger, A&P, Dominions and others began to expand their store network to a national profile. Walmart, launched in 1962, began in Arkansas before expanding nationally; their US store network map concentration (Figure 2) is similar to Dino Polska’s strategy, reflecting the success of expanding
through adjacent markets.
Figure 2 – Walmart Locations as of October 2020, aggregated by ScrapHero
The key long-term opportunity is store expansion. A recent call with management suggests that with 10 stores per 100,000 inhabitants in its most mature markets, they aim to reach similar levels across all regions they are present in; the current average is 3.6 stores per 100,000 inhabitants. During our call with management they reiterated that they expect to see 20% growth of their store base per annum, supporting their long-term ambition to be present in catchment areas with at least a 20,000 population.
Dino Polska’s success and competitive advantage was made clearer during a visit to Poland. My colleague, Rob Brewis, and I travelled between larger cities such as Wroclaw (640,000 inhabitants) and Gdansk (466,000) to smaller towns such as Lubin (72,000) and Polkowice (22,000). Given the distance to the hyper and supermarkets for smaller towns and villages, the proximity of Dino Polska stores were welcomed. Dino Polska owns the land bank, store buildings, and distribution centres. This is a key advantage as the Company has full ownership of the store roll out, enabling quick store openings and uniform store formats. Dino Polska’s smaller store formats and locations enable them to operate profitable stores in rural areas and small towns that would not be viable for their large format discounter peers who depend on high traffic to cover the large land and lease costs.
Another differentiation is that Dino Polska stores are designed to cater to the local consumer: our call with management highlighted that only half of their 5,000 products are fixed, enabling Dino to respond quickly to any changes to consumer preferences. Fresh food accounts for 40% of revenue, with fresh meat accounting for 15%; Dino Polska owns the entire fresh meat distribution for their stores through their meat production facility and distribution centre. With the average annual consumption of meat per person in Poland reaching 61kg (44kg in 2010) vs the United States at 100kg, Dino Polska is well positioned to capture premiumisation trends driven by improving household wealth.
Despite the Covid-19 pandemic and lockdown restrictions impacting the overall economy, consumption in Poland has remained resilient as nominal and real wage growth recovers. In addition, household consumption continues to be supported by government policies. In 2019, Poland announced that those under 26 years old would be exempt from income tax of up to PLN85,528 (US$ 23,325). The government’s ‘Family 500+’ programme, which provides financial support for children under the age of 18, was extended again in 2019. In November 2020, Prime Minister Mateusz Morawiecki announced an additional Covid-19 economic aid programme worth $9-$10bn to support enterprises. As consumption is expected to recover going into 2021, like for like (LFL) store sales growth will also benefit.
Macro tailwinds drive consumer growth and Dino Polska’s store expansion plan supports our expectations of Dino Polska seeing 17% CAGR in earnings growth (FY20-FY22), one of the highest growth rates in the EEMEA grocery retail sector.
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