Mercadona Business Model praised

Mercadona goes to Harvard

Study admires business model of successful family-owned supermarket chain

June 21st 2010

Zeynep Ton, a professor at the Harvard Business School, has been studying distribution chains for the last 10 years. She was working on an analysis of the Spanish clothing giant Zara when someone recommended that she take a look at Mercadona, the Valencian supermarket chain that has stores all over Spain. After researching the company’s business model, last September Ton spent three months on site, watching the system at work. Zeynep Ton and Simon Harrow published a paper with their conclusions in April, and they have since incorporated their experience into their course-work in class.

“In the 1980s, Toyota revolutionized manufacturing by producing high-quality vehicles at low prices by investing in systems and employee training. Mercadona is the Toyota of distribution,” they write. The paper describes the internal staff development model that all Mercadona employees are familiar with, and which has turned the 100-percent Spanish owned chain into awell-oiled machine.

“Mercadona’s productivity is above the industry average,” the paper reads. “In 2008, its sales of €232,260 per employee were an 18-percent improvement on the results of other Spanish supermarkets (Vegalsa, Sabeco, Miquel Alimentacio Grup and Distribuidora Internacional de Alimentación) and generated over a billion euros in sales.” Zeynep Ton writes of how Juan Roig, owner and CEO of Mercadona, and his wife Hortensia, took over control of the family-owned chain of supermarkets in 1990, just when large international distribution chains, especially French ones, were starting to set up in Spain.

Mercadona began as a small chain of eight grocery stores created by Roig’s father in 1977. Four years later, Juan and his three siblings bought it from Francisco and expanded by buying other local and regional supermarket chains. According to Family Business Magazine, Mercadona is now Spain’s second-largest family-owned business after El Corte Inglés. In 1993 Roig established a Total Quality Model (MCT) after experimenting with the traditional high-low pricing scheme used by other supermarkets. Instead, Mercadona offers “Siempre Precios Bajos” (Always Low Prices). Roig also started pampering his employeeswith higher-than-average salaries, long-term contracts and ongoing training, because his business model required “an enthusiastically engaged workforce.” Year-on-year sales growth and profits show that the strategy was correct.

Mercadona ended 2009 with 1,264 supermarkets in 46 Spanish provinces and 62,000 employees, every one of whom has a permanent contract — unusual in Spain, where high firing costs mean many companies resort to temporary contracts. Zeynep Ton says that one of the most surprising things about Mercadona is the way it considers customer needs first when it comes to decision-making. “The client comes first, and capital and investors come last.”

Penny-pinching methods
The Harvard professor also seemed surprised at Roig’s self confessed strategy of penny pinching, which means selling olive oil in square bottles to save space and transportation costs, meaning customers end up paying less. Mercadona’s close ties with its suppliers is another added advantage — the company buys products directly from producers. “Mercadona is capable of taking the entire supply chain into account, from the raw materials down to the cash register.” Roig’s formula of high re-investment and tight profit margins gives it an advantage over large US distributors, says Ton. “It would be hard for an American company to implement the Mercadona model. Most large distributors are too busy trying to satisfy Wall Street.”

Perhaps the best illustration of Mercadona’s long-term planning is its personnel policy. Ton notes that one of the reasons why the firm can offer its employees significant stability is that they can carry out multiple tasks and know how to stay busy when there are not many customers around. Mercadona does not subcontract anything in its stores — the cashiers stock shelves and cleaners become cashiers whenever necessary. All employees can perform any task.

El Pais (International Edition )

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