Mercadona: An Undisputed Winner

Satisfying ‘The Boss’, or how to become the leading supermarket chain in Spain by focusing on your clients’ needs

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Satisfying ‘The Boss’, this is our main objective. For ‘The Boss’ to fill his/her shopping cart menu at the lowest possible monthly cost and with the highest quality.

– Mercadona’s mission statement

Mercadona is a leading, family-owned supermarket chain in Spain which has been able to develop a successful business model since 1993 based on its strong focus on “The Boss”, which is how the company refers to its clients. The model of Mercadona seeks to satisfy the needs of the five stakeholders in its sustainable agro-food chain: The Boss, its employees, its suppliers, society, and the capital; placing The Boss at the center of every decision.

Outline Mercadona Model

With this model, the company has enjoyed double-digit growth for most of the past two decades, thriving through the severe Spanish economic crisis. The company operates a model of urban proximity with over 1,500 stores designed to make shopping quick and easy. With its 22.1% market share, Mercadona is the largest supermarket chain by sales in the country (tripling the 7.7% share of its immediate follower Carrefour) and the third largest by floor space. Five million Spanish households shop at Mercadona.

To provide the highest quality at the lowest cost, Mercadona developed a line of own-brand products (Hacendado, Bosque Verde, Deliplus, and Compy), which are consistently ranked #1 in terms of value for money by clients and are up to 40% cheaper than its competitors. The goal is to offer a total shopping model which meets all the ‘food, cleaning, hygiene, and pet care needs’ of The Boss.

mercadona-interiorThis focus on The Boss’ needs is the source of most of the competitive advantages of Mercadona’s model. For instance, Mercadona noticed that there were some products of which clients were regularly purchasing more than one unit per checkout. Mercadona designed a solution for The Boss by grouping those products in multiple-unit packages and, on average, these products showed an increase in sales of 12 units per store per day. This strategy allowed Mercadona to lower the cost of The Boss’ shopping cart preserving the highest quality.

Another key element of Mercadona’s operating model is its close relationship with suppliers. The company focuses on a limited number (120) of integrated supplier-manufacturers, with whom it holds a relationship of trust and a model of ‘virtual integration’. Mercadona invests in them and purchases the products directly from them, eliminating any additional costs from intermediaries and often signing long-term offtake agreements. For instance, Mercadona holds guaranteed contracts at stable prices with the farmers supplying agricultural products. This close, long-term relationship allows the company to squeeze its suppliers and demand the highest level of quality from them.

Mercadona’s operating model also has a strong focus on innovation. The company is the leader in R&D in the food and personal care industry in Spain, with an average of over 400 innovations per year. In fact, Mercadona was the first retailer in Spain to use barcode scanners. The company has a pragmatic approach to innovation, always pursuing the interests of The Boss. For instance, sticking a plastic lid on the tuna cans to make them easier to open translated into a 60% increase in sales. Of the total 450 innovations in 2014, 100 innovation products came from ‘co-innovation’ developed in collaboration with clients. The company has 12 ‘co-innovation’ centers, where it held over 6,000 sessions with The Boss only in 2014. In addition, the company incentivizes innovation among suppliers by, for example, organizing supplier innovation contests such as the ‘Sorolla’ innovation prize. As a matter of fact, Mercadona suppliers’ investment in R&D doubles the Spanish average.

Mercadona_ExteriorThese innovation efforts also help Mercadona reduce unnecessary costs in raw materials, transport and logistics, with measures such as: reducing air content in cereal and nuts packages, switching from glass to plastic in spices packaging, removing duplicate labels and reducing ink in labelling, removing the glossy finish on milk cartons, or using cubic packaging for milk and juices and square bottles for oil (to optimize the space usage). These are only some examples of the constant improvements which have contributed to save around €500 million per year in cost reductions. Mercadona directly translates these savings into lower prices for The Boss without harming the product quality.

Mercadona’s marketing model is also designed to reduce costs. The company does not invest in marketing campaigns nor advertising. It just focuses on word of mouth and social media, where it shares photos and videos with thousands of followers (@Mercadona Twitter account currently has 89,000 followers). Plus, the chain doesn’t have specific sales or discounts since all the products are sold at the lowest possible price, which also simplifies the operations and reduce marketing expenses (e.g. no need to frequently update the supermarket brochures).

The company has a workforce of over 70,000 employees, all of whom have permanent contracts and salaries above the industry average, including inventive bonuses. Furthermore, Mercadona invests heavily in its employees’ training: over 11,000 of them received training only in 2014. Staff turnover is consistently below 5% per year. This human capital strategy is also designed to serve Mercadona’s business model: “to satisfy The Boss you must be 100% satisfied and 100% committed”.

 

Sources:

– Mercadona Annual Report 2014.

– Mercadona, “Modelo de Gestión Total”, Mercadona’s website, https://www.mercadona.es/corp/esp-html/modelo.html, accessed November 29, 2015.

– Mercadona’s Twitter account, @Mercadona, accessed December 5, 2015.

– Interviews with Mercadona’s clients on November 25-29, 2015.

– Mercadona, “Los interproveedores de Mercadona duplican la media en Innovación en España”, April 16, 2014, Mercadona’s website, http://www.noticiasmercadona.es/interproveedores-mercadona-innovacion/, accessed November 29, 2015.

– “Mercadona, una estrategia ‘como un cohete’”, Expansión, December 6, 2015, http://www.expansion.com/directivos/2015/12/06/56645589ca4741c5168b4643.html, accessed December 7, 2015.

– Julia Hanna, “How Mercadona Fixes Retail’s ’Last 10 Yards’ Problem”, HBS Working Knowledge, July 19, 2010, http://hbswk.hbs.edu/item/how-mercadona-fixes-retails-last-10-yards-problem, accessed December 2, 2015.

– “Mercadona: Spanish aisles”, The Economist, June 10, 2011, via Factiva, accessed November 30, 2015.

– Wikipedia – Mercadona, https://en.wikipedia.org/wiki/Mercadona#cite_note-Spanish_Aisles-7, accessed November 30, 2015.

– “Spain: Mercadona reaches 22.1% market share”, http://www.freshplaza.com/article/135235/spain-mercadona-reaches-22.1-procent-market-share, accessed December 2, 2015.

– Miguel Ángel García Vega, “El envase sale a cuenta”, El País, via Factiva, accessed November 30, 2015.

– “Así seduce y así aprieta Mercadona”, lainformación.com, http://noticias.lainformacion.com/economia-negocios-y-finanzas/empresas/asi-seduce-y-asi-aprieta-mercadona_Y1aPiubxyQfk8cSrV8GQ31/, accessed December 2, 2015.

– Alberto Caparrós, “Las cinco claves del éxito de Mercadona”, ABC, via Factiva, accessed November 30, 2015.

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4 thoughts on “Mercadona: An Undisputed Winner

  1. Interesting article Luis. I wonder what the path for growth is now that Mercadona has reached 1500 stores nationwide which should be close to saturation given Spain’s size and comparing with international competitors in the UK, Italy or France. Have they expanded to other countries yet?

    1. Thank you Laurent! You pointed out a very interesting topic.
      Mercadona has still room to expand in Spain. The company opened 61 new stores in 2013 and 60 new stores in 2014, and has plans to launch more openings in 2015-2017.
      For instance, last year the company opened its first supermarket in the Basque region in the North of Spain. And this region is one of the wealthiest and most densely populated in the country. So I think this proves Mercadona has still potential to keep expanding within the country.
      In any case, for a long time there have been rumors about Mercadona’s plans for international expansion (in Italy, Portugal, and France), but in 2013 the company decided to ‘suspend’ them and stay focused on the Spanish market to fight the economic crisis.
      As I explain in my post, Mercadona’s model is based on a very close relationship with clients and suppliers to offer high-quality, fresh products at very competitive prices. Replicating this model in other competitive markets could be a real challenge.

  2. I was surprised by Mercadona’s focus on value engineering and continuous improvement in their line of self-branded products, 500 million euros per year in cost reductions is impressive. Many of the changes they made seem really minor but at such a large scale they add up to make to a serious impact. It was also interesting to see that they do not rely on advertising and marketing. These two aspects of their operations play right into their value proposition of being the preferred low cost provider and their recent growth despite the economic crisis is convincing proof of their model.

    Is their incentive system typical of other firms in Spain? They seem to really live by their model of placing employees right after the customer by giving out bonuses of up to two months salary to employees at the ground floor of the organization.

    1. Thanks for your comment Rob! Exactly, as you correctly explain, Mercadona’s model is impressive in many ways.
      To your question on their incentive systems, it’s not typical of Spanish companies; it’s actually rare, and even more so because the bonus schemes apply to every employee at every level, even ‘at the ground floor’. And perhaps even more impressive is that Mercadona hires its employees on permanent contracts. To put you in context, despite the fact that Spain enjoys the benefits of being a welfare state, the labor system has been suffering from endemic problems for decades. The unemployment rate is currently above 20% and over 90% of the new contracts signed in the first half of 2015 were temporary contracts. This is to give you a sense of how unique and superior is Mercadona’s approach, consistent with its philosophy of having a committed, satisfied workforce to best serve its clients.

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