Hypermarkets in Spain: Mercadona case

Due to the economic situation Spain is going through, hypermarkets have been obliged to reduce prices in order to get more customers or, at least, not to lose a significant amount of them. Contrary to expectations, main companies in this sector have seen their benefits grow an average of 40% annually. Let’s have a closer look to the hypermarket chain that seems to be in fashion lately: Mercadona.

Recently I’ve seen how this company is opening new supermarkets all over Madrid and family and friends are happier than ever shopping there due to its good quality products at reasonable prices. On the other hand they have mastered the promotion of its own-brand products, especially Hacendado, Bosque Verde, Deliplus and Compy.

While 10 years ago this kind of products were considered only cheaper imitations of the real-branded ones, nowadays they have its own identity based on a good quality-price relation and are not longer considered for the low-income classes.

Regarding Mercadona’s financial report for 2010 we can see how the net income of the company grew 47% from the previous year. Both operating income and income before taxes figures increased more than 50%. Sales and turnovers grew as well, but in a more discreet percentage.

However, having a more detailed look at the income statement figures it’s possible to calculate the net profit percentage, which is around 2.6% of the company’s revenues. This minimum margin of profit is common in a sector that relies in selling more units at lower price rather than the other way round.

It’s also frequent in the hypermarket sector in Spain to have short account collection periods, 2 days as an average for Mercadona, and long account payable periods, 61 days in this case. This scheme of collecting money very soon and paying very late allows the company to finance itself with the money they own to its suppliers.

Other shocking figures that can be calculated from the financial report data are:

The current ratio, which shows the capacity of a company to face short-term debts, which stands at 0,97 for Mercadona, almost reaching 1, the minimum that is, in general, expected from a company.

The working capital that, in this case and due to the financing system exposed above, is negative, -67.008 thousand of Euros. This figure doesn’t mean that the company is not doing well; it’s just a reflection of the way they trade with their suppliers.

To end up with, the return equity that relates net profit and equities stands at 0.18 for 2010 and the financial leverage that measures the risk of investment stands under 1. These figures mean that investment in the company is not highly profitable but safe.

For further economic analysis the 2010 annual report is available at Mercadona’s web page: http://www.mercadona.es/corp/ing-html/noticias.html

Mercadona, because of its marketing policy and financial scheme is a good example of the hypermarkets situation in Spain. The fact that the company stands for local commitment, transparency and friendly environmental behaviours, plus the quality and prices of its products, has contributed to the success of this hypermarket brand.

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