For Mercadona, Spain’s Leading Supermarket, TQM Has Been an Excellent Investment
From a struggle for survival to a position of leadership. That has been the road taken by Mercadona, the leader in Spain’s supermarket sector and the country’s second-fastest growing food distribution chain (Wal-Mart is first). It all began in the 1990s, when Mercadona’s president made the strategic decision to undertake Total Quality Management (TQM) -- an approach that has differentiated Mercadona from other companies and provided it with a competitive advantage. This approach can help companies confront the turbulent, rapidly changing environment that all organizations are facing, according to a new study by two professors at Spain’s King Juan Carlos University – Miguel Blanco and Santiago Gutierrez.
What does TQM involve? The researchers’ report in the Universia Business Review is called, “Using the Total Quality Model in Spain’s Retail Distribution Sector: The Case of Mercadona.” In that article, the two authors write that until TQM came, quality control had only been partially implemented. Now, they write, TQM “has enabled management to take a multidimensional approach and look for excellence along the company’s entire chain of value creation. Companies do that by maintaining a clear focus on the market and the customer, and by emphasizing total service quality.”
Introducing TQM, say the authors, is the direct responsibility of senior management. The fundamental components of TQM are “an orientation toward the external customer and stakeholders; internal cooperation and teamwork; leadership; commitment by management; management by processes and systems; information-based management; orientation toward people and to the internal client; apprenticeship; innovation and continuous improvement; developing partnerships; external cooperation; and a focus on ethical behavior.”
According to the authors, Mercadona is an outstanding example of TQM because “the company has developed the model with a series of characteristics that are practically unique.” Applying the model, they explain, has meant a profound transformation of the company. TQM has catapulted the company into an elite position in the marketplace, one in which Mercadona, an integrated family-owned chain provider of food and personal hygiene products, operates large supermarkets ranging from 1,000 to 1,200 square meters. Before Mercadona implemented TQM, it went through some hard times.
The Transformation Process
In 1981, Juan Roig, son of the company’s founder, took control of the company, transforming it from a small chain with several stores in and around Valencia, Spain, into a larger company active in other parts of the country. This expansion coincided with the overall growth of the supermarket sector in Spain. The growth was propelled by urbanization of the population and the incorporation of women into the labor markets. Growth, in turn, inspired other competitors from elsewhere in Europe to enter Spain.
During the 1990s, note the authors, ownership of the Spanish supermarket sector became concentrated in the hands of chains run by foreign multinationals, and the industry matured. Competition increased and margins narrowed. It was a period of turbulence and change. To address this situation, Mercadona began to adjust the prices it paid suppliers and to undertake aggressive advertising campaigns aimed at promoting the products in its supply chain. However, this approach did not lead to the expected results. Mercadona was selling more, but it was making less and less money.
In an effort to change the entire dynamics of the sector, Roig decided to enact the Total Quality Management model in 1993. Mercadona’s business strategy was summed up in the motto: “always low prices.” Mercadona cut its advertising expenses, canceled all of its offers to consumers and committed itself to always selling at the same low price. It began to change its relationship with suppliers, moving from being a tough negotiator to a company that was loyal to its suppliers and paid them stable prices over a period of years. Mercadona’s main goal, according to the study, was “to protect itself against so much turbulence by setting up a model that was different, original, and novel within the sector. The model involved achieving stability, not only in its pricing but in its relationships with suppliers and with its workforce -- all in an effort to achieve a permanent customer base.”
It took a long time to get results. Although Mercadona practically doubled its sales within four years, profits continued to fall. Despite everything, Roig was resolute in his strategy, and in 1995, people began to see a clear improvement. Starting then, note the authors of the study, “The company hurtled itself forward in a spectacular process of change that was fundamentally organic. It spread like wildfire and [Mercadona] became one of the leading supermarket chains in terms of market share and ... profits.” Now Mercadona has more than 60,000 employees in more than 1,100 supermarkets scattered almost everywhere around Spain. In the 2007 fiscal year, Mercadona earned net profits of €336 million. It has achieved an annual growth rate of 25.2 percent, and fourteenth spot in the global rankings for its sector.
According to the authors, Mercadona’s management believes that the TQM model has been the key to these growth figures and the company’s spectacular financial results. “Mercadona has re-invented itself with a clear orientation toward satisfying the needs of all of its stakeholders: customers, employees, suppliers, society, and capital. All of those parties are important in that sequential order,” says the study.
The Consumer Is the ‘Boss’
Mercadona starts from a universal premise: “In order to be satisfied, you first have to satisfy others.” Based on this concept, it has oriented its entire business model toward the total satisfaction of its customers, who are its true “bosses.” Customers are at the top of the company’s organizational pyramid. “This makes it an inverted pyramid in which the function of leadership and the rest of the organization is to serve customers.” The philosophy of Mercadona is to focus on increasing the value that it provides for each customer. First, it pursues a policy of low prices, eliminating discount offers, promotions and temporary discounts. It also manages to maintain a constant dialogue with the customer through meetings with people who live in neighborhoods near the supermarket. In addition, it provides specialized courses about its own corporate product lines, as well as ‘open door days,’ blind trials, and so forth. Mercadona gives priority to these types of initiatives over large-scale campaigns.
When it comes to quality, Mercadona strives to increase the nutritional content of its more than 9,000 products. By “quality,” the company also includes comfort, speed, integrity of service, and product variety. Rather than offer consumers a great number of brands, it provides for all sorts of consumer needs, ranging from food to personal hygiene, to cleaning products and pet food. In addition, the company regularly makes “prescriptions” on behalf of its customers. It selects and recommends products on the basis of their quality and low price, and guarantees the authenticity of their contents, place of origin and expiration date. To achieve that goal, Mercadona has created a system for managing its relationships with the suppliers who provide products that bear Mercadona’s own brands. “This gives customers a feeling of security, strengthens customer loyalty for these products, and generates trust,” the researchers write.
On the other hand, Mercadona has designed its stores so that they are divided by environments, and has taken other measures to minimize the time it takes for customers to make their purchases. The results of this policy can be spelled out simply: “Overall revenues have grown nearly twelve-fold over the last 10 years, and at an average annual rate of 22%.” The study emphasizes that this process involves more than simply opening new supermarkets. “The company has achieved noticeable growth in its sales per square meter [or per square foot] in each of the supermarkets in the chain.”
Commitment to its Workers
Mercadona’s workforce is another pillar of the TQM model, which involves getting workers to adjust to a working environment where quality ranks highest as a priority, according to the authors. The company does this by requiring a minimum of an eighth-grade education. Workers have to take exams that test their cultural knowledge. They must undergo testing that involves psychological response tests, interviews and group dynamics. Before they can even begin to work, they receive nine weeks of training about the TQM model, and they are trained in the culture of Mercadona. The training continues throughout their career with the company, continuing to develop their skills. All this is complemented by an internal promotion policy that makes it easier for workers to identify with Mercadona.
The average salary at Mercadona is a lot higher than the average in the sector. In addition, when it comes to Human Resources policy, TQM involves making a strong effort to accommodate workers’ personal and family lives to their careers as workers, the researchers say. As a result, Mercadona has achieved a significant reduction in its rates of absenteeism and employee turnover, which are usually very high in that sector. The company has also made noticeable improvements in the productivity of its workforce.
For example, as the study explains, each worker learns a half hour beforehand about the function that he or she must perform each day. This decision is based on such variables as the number of customers; needs for [product] replacement; and the personnel currently available in that store. Workers also know, a full month beforehand, what their work schedules are going to be. This makes it easier for them to organize their private lives.
On the other hand, in a sector where temporary work relationships usually predominate, the entire staff at Mercadona enjoys a stable work contract of indefinite duration. Company policy also assigns each worker to the supermarket closest to his or her home; provides workers with payments worth 100% of their salaries if they become physically disabled; and provides support for families in those cases where an employee has died.
Cooperation with Suppliers
Because its products need to provide customers with maximum satisfaction, “Mercadona has established ties with its suppliers based on trust, cooperation, mutual collaboration and stability,” explain the authors. The point of departure in the model is “the management and deployment of processes” in which Mercadona studies and analyzes products, all the way from when they leave the supplier until when they reach the consumer. Everywhere along that chain, the company’s goal is to avoid inefficiencies by strengthening cooperation even with those suppliers who provide nothing directly to Mercadona but who sell to Mercadona’s suppliers.
Mercadona distinguishes between four categories of suppliers: classic suppliers, “by the neck” suppliers, intermediaries, and intermediate suppliers. When it comes to classic suppliers, Mercadona maintains a conventional contractual relationship. As for the second category, this refers to Mercadona’s involvement with those manufacturers that have problems selling their products and for whom, Mercadona is a critical, or life-and-death customer. “Mercadona acquires a significant volume of their production volume, and these suppliers depend on these sales [to Mercadona] to survive,” the authors write. “As for the intermediaries, they are people who connect suppliers with Mercadona. However, because intermediaries don’t add value, Mercadona considers them unnecessary. They merely raise the cost of the product paid by the customer, so [Mercadona] tries to avoid using them.”
Finally, the intermediate suppliers are those suppliers that adopt and share the TQM model [with Mercadona]. They supply Mercadona with exclusive products, and Mercadona commits to maintaining a continuous relationship with them ‘for life,’ explains the study. These suppliers sign on to the philosophy of prescribing products that satisfy all of the needs of their customers. These kinds of suppliers know they have to provide Mercadona’s customers with the highest quality products at the lowest possible price because those products carry the labels of Mercadona’s exclusive brands. Mercadona demands that these suppliers comply with a series of requirements. These suppliers must “respond to data and indicators generated by the customer and the marketplace so that they [these suppliers] can contribute solutions that meet consumers’ demands.” Beyond that, ‘intermediate suppliers’ must be willing to introduce the TQM model into their own organizations. They must be willing to accept audits by Mercadona that verify the degree to which they are complying with the TQM model. Finally, Mercadona requires these suppliers to make certain products on an exclusive basis [for Mercadona], based on a relationship of mutual trust and cooperation between both companies.
One of the most original and innovative aspects is that companies that want to become intermediate suppliers to Mercadona must undergo a long and complicated process, the study says. Ultimately, Mercadona’s goal is for these suppliers to manufacture in response to the needs of their customers; that is, according to their expectations and demands. This means acting jointly with Mercadona, and sharing information that Mercadona acquires through various processes. “This is where this relationship [between Mercadona and its intermediate suppliers] fits perfectly into the management philosophy of Mercadona, which is to become a company that prescribes all sorts of products for its customers.”
For its part, Mercadona pledges to “communicate to its intermediate suppliers what it has learned about its customers’ needs. They [Mercadona and its intermediate suppliers] jointly develop products and services, applying a coordinated form of TQM. And both sides in the relationship measure how well they have applied the value/effort model,” according to the study.
An Ethical Orientation
From an ethical viewpoint, Mercadona is committed to protecting and developing the community. As the authors note, “the most unusual thing about Mercadona is that it doesn’t limit itself to undertaking initiatives that demonstrate its commitment and social responsibility. It is also concerned about measuring the impact and repercussions of those policies.”
Although Mercadona is a family-owned company that is not traded on the stock exchange, the authors use the word “spectacular” to describe its growth. The company’s profits are now 34 times higher than a decade ago, reaching €336 million [in fiscal 2007].
One of the TQM model’s main challenges is to introduce programs and develop tools that make it possible for everyone involved (customers, workers, and so forth) to satisfy their needs. For all that, the authors write that the model “has enabled Mercadona to achieve competitive advantages over its competition; globalize the orientation of its strategy and business culture; and deploy a coherent tool for decision making.” Every decision taken within corporate headquarters needs to reflect the TQM model, the authors of the study write. Only those measures that satisfy all of its components are adopted and put into practice. Those proposals that fail to do so are rejected.
Clearly, companies in other sectors need to make adjustments when they try to implement the TQM model. However, there are valid reasons to think that TQM is a viable approach, say the authors. Some companies that have supplied Mercadona have achieved even higher growth rates and profits than Mercadona itself [by implementing TQM within their organizations.]
Despite the strengths of the TQM model, Mercadona will continue to face challenges. One of these challenges will be how to get started outside Spain. The company is currently considering plans for expanding in international markets, but the details have yet to be spelled out. Beyond that challenge, because Mercadona is a family-owned company, it will have to deal with the problem of succession and how the company will continue [to be owned] in future generations.