Dino Polska Deep Dive Part 2
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I’m Pieter and welcome to a 🔒 subscriber-only edition 🔒 of Compounding Quality.
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Dino Polska is one of the highest-quality compounders I know:
The founder Tomasz Biernacki still owns 51% of the company
Strong competitive advantage
Attractive competitive environment
Let’s dive in!
Is management capable?
Tomasz Biernacki is the founder and main shareholder of Dino Polska. In 1999, he founded the company. This means we’re talking about an Owner-Operator company.
A positive? Tomasz Biernacki is one of the most secretive businessmen in Poland. He didn’t show up at the stock exchange during the IPO in 2017 and he refuses to meet investors in Warsaw. Instead, he asks them to visit Dino’s headquarters about 200 miles away.
Furthermore, Tomasz Biernacki is also well known for his frugality. To give you an example: Tomasz, a multibillionaire, is very cost-conscious, and has a reputation for being a penny pincher when it comes to managing operating costs. He was famously involved in picking the lowest-cost basket maker for garbage collection at the stores.
Today, Tomasz Biernacki has an estimated net worth of $6.2 billion and he still owns 51.2% of the company.
Szymon Piduch also played an important role in Dino Polska’s success. He worked for the company since 2002. From 2010 Szymon was the president of the Management Board (replacing founder Thomasz Biernacki) and in 2020 he joined the supervisory board. He served as Dino’s CEO but resigned in 2021 due to personal reasons.
Since then, Dino Polska hasn’t appointed a new CEO. Founder Tomasz Biernacki runs the company together with a three-person management board:
Izabela Biadala - Chief Operating and Administrative Officer:
Joined in 2002
Owns 80 shares of Dino Polska
Michael Krauze - Chief Financial Officer:
Joined in 2002
Owns 30,000 shares of Dino Polska
Piotr Scigala - Chief Control Officer and Management Board Member:
Joined in 2003
Owns no shares of Dino Polska
It’s great to see that key management has been working for Dino Polska for a long time. Ideally, we would like to see higher insider ownership of these key managers.
Another positive? Dino Polska has a great company culture and focuses relentlessly on the long term.
You don’t believe me? Just think about the fact that they prefer building and owning their stores instead of leasing them. This is an investment that only makes sense when your investment horizon is longer than 9 (!) years.
It’s also noteworthy that management is paid in cash on a fixed and variable basis. Their fixed salary cannot exceed 10 times that of any employee in the company. Bonuses are based on annual net income.
Does Dino Polska have a competitive advantage?
Dino Polska has a sustainable competitive advantage for sure.
They have the lowest grocery prices in Poland, a wide offering and it’s the only grocery company in the country that owns (nearly) all its real estate. Its management focuses on the long-term and they are a clear market leader in rural areas.
So far, no competitors have replicated Dino’s business model and it would be really hard for them to do so.
Dino Polska benefits from economies of scale because they standardize every store
Dino Polska owns 95% (!) of its stores and it takes 9 years before you reap the benefits from this. This gives Dino a cost advantage over time
High capital requirements: it would take more than $1.5 billion (!) to rebuild Dino’s store network today
First-mover advantage
Dino Polska has a wide and superior distribution network
Here are a few pillars on which Dino Polska has built its success:
Dino Polska is the number one grocery store based on price, convenience, and selection in Poland
The high-frequency nature of grocery trips in Poland suggests people prefer grocery stores that are within proximity to their homes
95% of Poles shop for groceries at least once per week
Typical Poles have a small fridge and cannot save food for weeks
Meat processing: Dino has its own meat processing company. This allows them to have quality control for its meat throughout its locations. Back in 2003, Dino acquired Agro-Rydzyna. Polish people don’t like to eat out. The daily routine for a Polish household is to purchase fresh meat and prepare meals at home. Dino offers fresh meat while most competitors offer meat in vacuum-packed plastic wraps.
Owning its stores: Via Krot-Invest, Dino Polska builds its own stores. It’s the only grocery company in Poland that does this and it provides them with a cost advantage.
Standardization: The firm maintains a uniform layout and product range across its chain, with every outlet featuring a 400 square meter floor space
Smaller standardized stores like the ones of Dino have been taking market share from traditional mom-and-pop stores over the past few years
Standardized stores also increase the predictability of the business
Focus on rural areas: 80% of Poland’s population lives outside large cities in rural areas. Dino Polska focuses on these low-density niche locations with around 3,500 potential customers per store. These areas are too small for larger hypermarkets to target.
Lowest-priced groceries in Poland: Dino Polska’s groceries are always (among the) lowest-priced in Poland
Distribution cost savings: Dino Polska has a distribution center for every 300 stores on average. The stores receive fresh products daily. It would require significant investments for new entrants to replicate the efficiency of Dino’s distribution network.
Economies of scale: Dino doesn’t use middlemen and supplies most SKUs directly from main representatives or producers. Dino also has his own meat supplier, providing them with extra cost savings.
Negative working capital: Dino Polska’s working capital is negative. This means that clients pay Dino Polska faster than they need to pay their suppliers. This is a very good position to be in.
No advertising needed: Dino Polska spends no money on advertising because there is no need to when you focus on villages and small towns. Competitors like Biedronka, Lidl, and Stokrotka who focus on bigger towns and cities on their turn do have to spend money on advertisements.
Companies with a sustainable competitive advantage are often characterized by the following:
High and sustainable Gross Margin (> 40%)
High and sustainable ROIC (> 15%)
Here’s what things look like for Dino Polska:
Dino Polska has a Gross Margin and ROIC of 21.6% and 23.3% respectively.
Usually, we want a Gross Margin larger than 40% but Dino Polska is a retailer. For a retail company, a Gross Margin of 21.6% is quite good (For reference: Costco’s Gross Margin is equal to 12.5%).
Is Dino active in a competitive environment?
From 1990, GDP per capita in Poland grew from $1,731 to more than $20,000 today.
Poland has one of the fastest-growing GDP per capita rates globally. The country has the second-highest average household size (2.9) and the second-lowest average rooms per person (1.1).
Most Polish households have a lack of storage space which is why Poles seldom buy in bulk. Instead, they visit grocery stores very frequently (at least once a week). Only a small fraction of the Polish population lives in large cities (around 20%). Around 40% live in rural areas (small population and low density) while another 40% live in small and medium-sized towns (< 200,000 citizens). In Poland, there is a trend of ruralization (in developed countries the opposite is happening).
That’s exactly why Dino Polska focuses on proximity supermarkets in rural areas.
As you already know by now, Dino uses a high level of standardization to build its stores. A typical store looks like this:
400 square meters (4,300 square feet)
Built on owned land (no leasing)
Carries around 5,000 SKUs
Targets 3,500 potential customers
The end market for Dino Polska has grown at a CAGR of 5.4% since 2009 and it is expected to grow at a CAGR of 7.4% until 2027 (mainly because of higher inflation).
Small mom-and-pop stores can still be seen as Dino Polska’s main rival. Over the past few years, small-format grocery chains have been plundering market share from “traditional” mom-and-pop stores and larger-format grocery chains. The consensus states that this trend will continue in the coming years, giving an extra tailwind to Dino Polska.
Dino Polska is the third largest grocery retail brand in Poland with an estimated market share of 5%. Dino’s largest competitor is Biedronka (23.4% market share). So far, branded grocery stores have been taking market share at the expense of traditional mom-and-pop stores.
The top 3 players in the industry (Biedronka, Lidl, and Dino) are the largest market share winners. Columbia Business School estimates that Biedronka won 8.6% market share, Lidl 5.5%, and Dino Polska 4.1%.
There is no competitor that Dino respects more than Biedronka. Biedronka is a discounter with the highest brand recognition among all grocery chains in Poland. Biedronka has 3,250 stores across all geographies in Poland including rural areas, suburban towns, city outskirts, and city centers.
Sohra Peak Capital believes Dino has an advantage over Biedronka for the following reasons:
Dino store land plots are meaningfully smaller than small-format Biedronka land plots, which means Dino has an easier time finding new store locations
Dino’s offering is 100% catered towards small-town Poland, but Biedronka’s small-town grocery selection is a hybrid between urban and rural
Biedronka is a mature grocery network with only +3-5% annual sales growth
Dino offers higher quality meat in every grocery store through its fresh traditional meat counter, whereas Biedronka only offers packaged meat
As you can see here, Dino has a price advantage over Biedronka. Dino is cheaper than Biedronki in each chain:
Dino Polska started in the west of Poland and is gradually expanding to the east. Since 2007, Dino never had to close a store and this probably won’t happen anytime soon. Dino should be able to replicate its business model in the east of Poland successfully:
But how much room for growth does Dino Polska have left? Let’s find out.