Latest / Business Strategy Talks with Fexingo: Competitive Advantage, Market Positioning, and Growth Planning / How Mercadona Built a Moat on Private Label and Store-as-Brand
Transcript
- Lucas: When most people think about private-label groceries, they picture a generic can of beans with a store's logo slapped on it. But one Spanish chain has turned that model into something far more strategic, and it's built a moat that discounters like Aldi and Lidl have struggled to crack. Luna: You're talking about Mercadona. I've seen the numbers — they control something like 25 percent of the Spanish grocery market. That's enormous for a single player in Europe. Lucas: Right. And what's fascinating is how they did it. Mercadona doesn't just sell private-label products — it treats the entire store as a single brand. Over 90 percent of what they sell is under their own labels, with names like Hacendado for food, Deliplus for personal care, and Bosque Verde for cleaning. Luna: So the customer walks in and essentially sees one brand across every aisle. That's a huge departure from the typical model where national brands like Nestlé or Procter & Gamble dominate shelf space. Lucas: Exactly. And Mercadona's approach goes deeper than just putting a label on things. They practice something called 'total quality management' with their suppliers. They don't just contract out production — they co-develop products. For example, they worked with a Spanish dairy cooperative for years to create a private-label yogurt that actually outperformed Danone in blind taste tests. Luna: That kind of supplier partnership is hard to replicate. It's not just about price — it's about trust and shared R&D. Lucas: And that trust feeds into their cost structure. Mercadona famously operates on a 'less is more' philosophy. In 2016, they cut over 1,000 SKUs from their shelves — about 30 percent of their assortment — because they found that customers were overwhelmed by choice. That's the opposite of what most retailers do. Luna: Wait, they voluntarily reduced variety? How did that not hurt sales? Lucas: Because they focused on the best-performing products in each category, and then worked with suppliers to make those products even better and cheaper. The result was higher turnover per SKU, better inventory turns, and lower operating costs. Their gross margins are around 25 percent, compared to 30-plus for traditional supermarkets, but their net margins are actually higher because of the efficiency. Luna: So it's a volume and efficiency play. But what keeps competitors from copying it? Aldi has private label. Lidl has private label. Lucas: The moat comes from two things: the depth of supplier relationships and the employee ownership structure. Mercadona is still run by its founder, Juan Roig, but he's gradually transferred ownership to employees through a profit-sharing scheme. About 80 percent of the company is now owned by its workers. That creates a culture of cost discipline and quality focus that's hard to hire for. Luna: Because employees have a direct financial stake in the store's reputation and efficiency. Lucas: Right. And that shows up in things like shrinkage — theft and spoilage. Mercadona's shrinkage rate is about 0.5 percent, compared to an industry average of 1.5 to 2 percent. That's a huge cost advantage that compounds over time. Luna: I'd love to hear more about the fresh food side. I've read that they use a 'prescription model' in their fresh departments, where they only stock a limited number of varieties based on what's in season. Lucas: That's right. In produce, they might carry only three types of apples instead of ten. But they work directly with growers to ensure those three varieties are the best quality for the price. And because the volume is concentrated, they can negotiate better prices and reduce waste. It's the same logic as the SKU rationalization applied to perishables. Luna: So the customer gets a simplified choice that's actually better curated, and Mercadona gets better margins and less waste. That's a win-win. Lucas: And it's incredibly difficult for a discounter like Aldi to match that because Aldi's model is built on buying surplus production from national brands and selling it cheap. They don't have the same co-innovation relationship with suppliers. Luna: Speaking of which, we should mention that this kind of deep analysis is exactly why this show exists. If these conversations have moved your work forward in some small way, a couple of dollars a month genuinely keeps them going — buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small thing that makes a real difference. No pressure, just if you've gotten something out of it. Luna: Exactly. Now, back to Mercadona — one other angle I find interesting is how they handle non-food categories. Their Deliplus line for personal care, for example, is actually manufactured by the same contract producers that make products for L'Oréal and Unilever, but at a lower price point. Lucas: That's a common misconception about private label — that it's lower quality. Mercadona actually tests their products against market leaders and demands that they match or beat them in blind tests. If a product doesn't pass, it doesn't get on the shelf. Luna: So they're essentially using the same manufacturing as premium brands but stripping out the marketing spend and the brand premium. Lucas: Exactly. And that's why their shelf prices can be 30 to 40 percent lower than national brands for comparable quality. The moat here is that once a customer trusts the store brand, they stop price-comparing across stores. They just go to Mercadona for everything. Luna: That loyalty is incredibly valuable. What about international expansion? They've stayed mostly in Spain, right? Lucas: They've expanded slowly. They have some stores in Portugal and a small presence in France, but they haven't tried to take over the world. And I think that's part of the moat — they're not distracted by growth for growth's sake. They're focused on dominating their home market with a model that's deeply integrated into the local supply chain. Luna: So the lesson for other retailers is: don't just copy the private label strategy. Copy the supplier co-innovation, the SKU discipline, and the employee ownership culture. Those are the hard parts. Lucas: And that's what makes Mercadona a genuinely different kind of business. It's not a low-cost operator in the traditional sense — it's a high-efficiency operator that uses private label as a vehicle for quality and trust, not just cheapness. Luna: It's a great example of how a moat can be built on operational excellence rather than patents or network effects. Lucas: Right. And one final number that sticks with me: Mercadona's return on invested capital has averaged over 20 percent for the last decade. That's a level most retailers can only dream of. The moat is real.