HBP# IM1312

IMD-7-2406
24.05.2023

DENNER:
THE STRATEGIC CHALLENGE
FOR A SWISS RETAIL DISCOUNTER

Bas Emmerig, Sacha Kienle, Dimitrii Gavrilin and Gerd Kaiser-Kossmayr (IMD EMBA
2022) prepared this case under the supervision of Professor Stefan Michel as a basis
for class discussion rather than to illustrate either effective or ineffective handling of a
business situation. Some names and details have been disguised.

Copyright © 2023 by IMD – International Institute for Management Development, Lausanne, Switzerland
(www.imd.org). No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form
or by any means without the prior written permission of IMD.

This document is authorized for use only by MIKHAIL ARON QUIZAN GORRE in [1232_ACYMAG2_K31] - MANAGEMENT ACCOUNTING 2 at De La Salle University, 2024.
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DENNER: THE STRATEGIC CHALLENGE FOR A SWISS RETAIL DISCOUNTER

As a result of Covid-19, new trends had emerged that were quickly changing the
supermarket retail landscape. The pandemic was responsible for strong supermarket
revenue growth, and it was clear that some revenue trends would become permanent.
Denner AG, a leading food discount retailer in Switzerland, wanted to capitalize on the
opportunities arising from these trends to secure future growth and revenues. Therefore,
the board needed to be advised of the potential strategic initiatives and, most importantly,
the optimal course of action.

Urs Kneubühler, Denner’s newly appointed chief operating officer (COO), was asked by
Denner’s board to prepare a strategic plan for the business for the next five years. With
over 850 stores and about CHF 4 billion in revenue, Denner was well known in
Switzerland where it was the number two food retailer. Migros AG, Switzerland’s largest
cooperative food retailer, had acquired Denner in 2010, and together they dominated the
supermarket retail sector in Switzerland.

While Migros had strict bylaws prohibiting the sale of alcohol and tobacco in its stores,
Denner was known for its wide assortment of wines and spirits. This served as a
compelling justification for Migros’ acquisition. Historically revenues from alcohol had
averaged around 32% of Denner’s total revenues. Denner stores were typically found in
city centers, while the larger Migros stores were often situated just outside of town.

In March 2020, with Covid raging through Europe and Switzerland, supermarket sales
were enjoying strong growth. Economies were shut down on a regular basis and only
essential supermarket stores were open for business throughout the pandemic.
However, with economies opening again, it was expected that store traffic and revenues
would normalize toward their long-term averages from 2022 onward.

In addition to strong revenue growth, the pandemic was also responsible for broken
supply chains making food inflation a force to reckon with. Throughout the pandemic,
people had also become more health conscious, leading to strong demand for fresh and
healthy produce. And with the closure of restaurants and bars during the pandemic,
Denner also saw strong growth in its alcohol sales.

Not all trends would be permanent, but the pandemic had caused many changes in the
food retail landscape. Because of these trends and their possible effect on Denner’s
business model and future revenues, Denner needed a new strategic plan to secure
future revenues and growth in a post-Covid world.

© 2023 by IMD 2
This document is authorized for use only by MIKHAIL ARON QUIZAN GORRE in [1232_ACYMAG2_K31] - MANAGEMENT ACCOUNTING 2 at De La Salle University, 2024.
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DENNER: THE STRATEGIC CHALLENGE FOR A SWISS RETAIL DISCOUNTER

A BRIEF HISTORY
Denner’s parent company Migros was founded in 1925, with the clear goal of serving the
average citizen (income wise) with reasonably priced food. Migros was a cooperative,
and its bylaws stated that it was not allowed to sell alcohol or tobacco, which was unique
to Migros and helped to boost its image.

This reputation has been built up over almost a century. In 1925 visionary
Swiss entrepreneur Gottlieb Duttweiler (1888–1962) sent five converted
vans onto the streets of Zurich to sell basic foodstuffs. The following year
Migros opened its first store in Zurich. 1

Denner AG was founded in 1967 by Karl Schweri, with a clear focus on the hard discount
sector. It went on to have more than 850 stores all over Switzerland – split into around
580 directly owned and around 270 in the franchise system – and it was one of the
biggest networks in Switzerland compared to Aldi (200 stores), Lidl (160), Migros (630)
and COOP (950).

Denner evolved over time to become the local supplier with low prices. Known for its
broad wine, beer, spirits and tobacco assortment, its wine, beer and spirits were
responsible for 32% of total revenue (see Exhibit 1) – a percentage that had barely
changed over the years.

In 2000, Philippe Gaydoul succeeded his grandfather as CEO of Denner AG, and in
2009, he sold Denner to Migros Group – Switzerland’s biggest, privately owned employer
and food retailer. Denner and Migros remained as independently operated brands, but
together, they represented over 51% of total Swiss supermarket sales.

DENNER AG: THE LEADING FOOD DISCOUNTER IN

SWITZERLAND
In 2011, Urs Kneubühler joined Denner as a regional sales manager. He started
managing a small number of regional stores in Switzerland. Over the years Urs’ strong
commercial skills and knowledge of the food discount world did not go unnoticed by
Denner’s management. In 2019, to prepare Urs for a role on Denner’s management
team, he was offered the opportunity to enroll in the Executive MBA program at IMD
Business School in Lausanne, which proved to be an excellent way for Urs to broaden
his skillset and work on his leadership. In November 2019, Urs was promoted to the role

1 Swissinfo.ch (2021) Retail giant Migros confronts its complicated history with alcohol available

at: https://www.swissinfo.ch/eng/should-retail-giant-migros-start-selling-alcohol-/47103466
(accessed 16 January 2022)

© 2023 by IMD 3
This document is authorized for use only by MIKHAIL ARON QUIZAN GORRE in [1232_ACYMAG2_K31] - MANAGEMENT ACCOUNTING 2 at De La Salle University, 2024.
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DENNER: THE STRATEGIC CHALLENGE FOR A SWISS RETAIL DISCOUNTER

of chief operating officer (COO) of Denner AG, making him responsible for all Denner
stores in Switzerland and a member of the board.

DENNER INCREASED REVENUE BY MORE THAN 30%

OVER 10 YEARS
Over time, the number of stores had increased by 9 stores net per year, from 763 in 2011
to 850 in 2021 (see Exhibit 2). In 2010, Denner AG started its online wine shop to benefit
from the growing online trend in one of its core product categories.

To increase its revenue and earnings growth, Denner had launched a number of strategic
initiatives known as “Fokus.” Initially, these initiatives focused on Denner’s directly owned
stores and were later rolled out to its franchise stores. For example, to make its stores
more attractive, it removed the pallets to improve the look and feel of the stores, added
some fresh products, such a fresh baked bread in some stores, and expanded its range
of fruits, vegetables and dairy products (see Exhibits 3 and 4). As a result, Denner
successfully outperformed the market and grew the business by 30%. It was also the
market leader in wine, spirits and tobacco due to its extensive wine assortment and
excellent pricing and discounts.

Because Switzerland is geographically and politically surrounded by the European

Union, prices were relevant to customers. About one-third of market revenues resulted
from cross-border shopping in Germany, France, Austria and Italy. On 15 January 2015,
Switzerland announced it was scrapping its currency peg to the euro. Shopping abroad
immediately became up to 20% cheaper than in Switzerland.

COVID-19 RULES THE WORLD

Covid-19 hit Switzerland in March 2020 and shook the retail market positively. People
were no longer allowed to eat in restaurants, go on vacations abroad or do their shopping
in Germany, Austria, France or Italy.

Denner´s revenue had grown by CHF 1 billion over the previous 10 years, with the
Covid-19 pandemic leading to a 17% cumulative increase in sales for two years – 2020
and 2021 (see Exhibit 5).

Alcohol sales, which had been strong historically, were significantly higher during Covid
because restaurants and bars were closed. Denner’s proximity to its customers enabled
it to capitalize on the extra demand for alcohol. In terms of fresh products, Denner had a
market share of about 7%, versus an overall market share of over 11%. A typical Denner
store had around 2,500 stock keeping units, a 50% broader offering than other players
in the discount segment. Food and non-food had always brought in a steady stream of

© 2023 by IMD 4
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DENNER: THE STRATEGIC CHALLENGE FOR A SWISS RETAIL DISCOUNTER

revenue. However, non-food was seeing a decline in growth, which could probably be
attributed to the rise of online shopping – a trend that had clearly picked up during the
pandemic. (Exhibit 6 shows a historical overview of Denner’s biggest revenue drivers
by category.)

THE SWISS RETAIL MARKETS

In 2021, the Swiss stationary retail trade recorded record sales of CHF 33.3 billion with
food goods exhibiting a 0.9 % drop from the previous year. Fresh goods accounted for
around 50% of overall retail sales – about CHF 15 billion. Wine, beer, and liquor sales
were only CHF 2.2 billion, or around 8% of total food sales. The pandemic impacted both
food merchants and their distribution methods in 2020. Border closures and pandemic-
related limitations halted shopping trips, resulting in major growth for the retail industry.

Retail chains were the most significant sales channel for Swiss agriculture, accounting
for 77% of total sales. Discounters had a 17% market share in food, with the remaining
coming from specialty merchants, weekly markets and direct marketing. Overall, a Swiss
private household spent an average of CHF 7,680 on food in 2021, excluding online
purchases. 2

With the Swiss economy opening and normalizing again in 2021, it was not expected
that this growth would be repeated. Rather, it was expected to normalize again toward
its long-term average. But although supermarket sales were back to their long-term
average, some revenue drivers had changed. Some of this could be attributed to the
pandemic, while others could be the beginning of a longer-term trend. One trend that
was being seen not only in Switzerland, but also worldwide, was that people were
becoming more health conscious. This trend accelerated during the pandemic as more
shoppers demanded fresh produce, artisanal bread, fresh juices and fruit, which was
changing the retail landscape.

DENNER OUTPERFORMED ITS COMPETITION

Food and beverages were primarily distributed through the highly consolidated retail
sector, which was dominated by Coop and Migros (including Migros’ discount chain
Denner). Coop and Migros controlled over 80% (without Denner) of the Swiss food retail
sector and were among the top 50 largest retailers globally. Denner outperformed Coop
and Migros, both of which had a 1.5 % loss in growth in their supermarkets and
hypermarkets in the food retail sector, and a 1% increase during the Covid crisis in 2021.

2 Nielsen.com (2021), Nielsen Universe monthly reporting, Denner internal data

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DENNER: THE STRATEGIC CHALLENGE FOR A SWISS RETAIL DISCOUNTER

SWITZERLAND’S FOOD COSTS WERE HIGHER THAN

IN ANY OTHER EUROPEAN COUNTRY
Switzerland had the highest level of food and beverage prices in Europe. With an index
score of 163, food prices were 63% more than the European Union average and 62%
higher than food prices in Germany. Norway, Iceland and Denmark were the next nations
with the highest food prices on the list.

Quality versus price is in focus

Quality was particularly essential to the Swiss when it came to food. The following
statement – “When it comes to food, quality is more important to me than price” – applied
to around 83% of the Swiss population aged 14 and above. Another consideration was
sustainability; in 2019, slightly less than half of those polled in Switzerland chose items
from firms that put an emphasis on sustainability in the manufacture, sale and usage of
their products. Organic food suppliers were also doing well. Organic goods accounted
for about CHF 3.8 billion in sales (+19.1%) in 2020, with a market share of 10.8%. In
2020, the most popular organic items were eggs, bread and vegetables. With store traffic
increasing again, a rise in the average shopping bill was also being seen.

ALL ABOUT THE FUTURE

Looking ahead had not become easier in a post-Covid world. Confronted with a fast-
changing retail and supermarket landscape, Denner’s board asked its newly appointed
COO Urs to present a five-year strategic plan.

During the meeting, one of the board members asked, “How do you plan to maintain
growth and market share considering the changing trends we’re seeing today?”

When the board meeting ended, Urs’ head was spinning from all the questions that had
been raised – all valid questions that needed to be answered. Clearly, the task that lay
ahead for Urs was to ensure the success of Denner for the next five years.

A NEW STRATEGY IS ARISING

Over the years, Denner had been growing steadily, and the competitive landscape had
changed as Lidl and Aldi had entered the market in 2006. Food retail was clearly one of
the pandemic winners, and the board was focusing on cutting overall costs and improving
profitability. But it was undeniable that the pandemic had changed the food retail industry.
New trends had emerged, and some had been accelerated.

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DENNER: THE STRATEGIC CHALLENGE FOR A SWISS RETAIL DISCOUNTER

It was exciting times, and Urs was looking forward to the challenge and opportunity of
writing and presenting a new strategic plan for Denner. Finally, he had a chance to put
his EMBA learning and concepts into practice. Data was gathered and no theoretical
framework remained untouched. Over the next weeks, Urs worked on a solid strategic
plan that would answer all questions and satisfy the board – a strategic plan that would
focus on costs and some strong suggestions for growing future revenues without the
need for radical change.

Urs thought this was going to be smooth sailing and certainly not a test of his agility. With
three days still to go before he presented the plan – enough time to finalize the
presentation and prepare – Urs poured himself a drink, while thinking of a well-deserved
ski break before the next board meeting.

Fully enjoying the exquisite taste of his 12-year-old Macallan, he heard the newspaper
fall onto the doorstep. Urs opened the front door and saw the headline filling the front
page; it made him turn pale: “Retail giant Migros confronts its complicated history with
alcohol.” 3

3 Swissinfo.ch (2021) Retail giant Migros confronts its complicated history with alcohol available

at: https://www.swissinfo.ch/eng/should-retail-giant-migros-start-selling-alcohol-/47103466
(accessed January 16th, 2022)

© 2023 by IMD 7
This document is authorized for use only by MIKHAIL ARON QUIZAN GORRE in [1232_ACYMAG2_K31] - MANAGEMENT ACCOUNTING 2 at De La Salle University, 2024.
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DENNER: THE STRATEGIC CHALLENGE FOR A SWISS RETAIL DISCOUNTER

Exhibit 1: Denner AG market share and share of Denner total revenue

Denner Share
50% 45%
45%
40%
35% 32%
29%
30%
25% 21%
20%
15% 10% 9% 10% 9% 11%
9%
10% 5%
5%
0%
Food Fresh Non-alcoholic alcoholic Near Food Total

Market Share Denner Share of total revenue

Source: Statista.com (2022), Schweizer Detailhandel, (accessed 30 June 2022) and predictions

Exhibit 2: Growth of stores in numbers (2011-2021)

Number of stores 2011 to 2021

860 + 87 stores 850

840

820

800

780
763
760

740

720

700
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Source: Denner internal data (2022)

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DENNER: THE STRATEGIC CHALLENGE FOR A SWISS RETAIL DISCOUNTER

Exhibit 3: Denner store before refurbishment

Source: Denner internal data (2022)

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DENNER: THE STRATEGIC CHALLENGE FOR A SWISS RETAIL DISCOUNTER

Exhibit 4: Denner stores after refurbishment

Source:Denner.ch (2022), Official Communication Pictures, https://www.denner.ch/de/ueber-

uns/mediencenter/bildergalerie/ (accessed 24 April 2022)

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DENNER: THE STRATEGIC CHALLENGE FOR A SWISS RETAIL DISCOUNTER

Exhibit 5: Denner AG revenue (2011-2021)

Revenue 2011 to 2021

in Mio. CHF

4,500

4,000 + 1 026 CHF 3,820

3,500

3,000 2,794

2,500

2,000

1,500

1,000

500

0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Source: Denner internal data (2022)

Exhibit 6: Market size of main product groups

Market Switzerland 2021

14,247,536,609

11,530,135,370

3,225,088,192
2,559,030,726
1,515,834,367

Food Fresh Non-alcoholic alcoholic Near Food

Source: Admin.ch (2022), Schweizer Detailhandel (accessed 30 June 2022)

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This document is authorized for use only by MIKHAIL ARON QUIZAN GORRE in [1232_ACYMAG2_K31] - MANAGEMENT ACCOUNTING 2 at De La Salle University, 2024.