THE BIG BRANDS GO BEGGING IN EUROPE
THE BIG BRANDS GO BEGGING IN EUROPE
2005-03-15 at 9:41:00 am #10869
The Big Brands Go Begging In Europe
They’re on fewer shelves as Europe’s
private-label business takes off
McBride PLC is not a household name, and that suits
the company just fine, even though European consumers spend almost $1 billion a
year on the household cleaners, laundry supplies, and hair- and skin-care
products it makes. McBride, based near Manchester, England, is in the
private-label business, making goods that European retail chains sell under
their own in-house brands. The work isn’t glamorous, but it’s lucrative: McBride
posted a 27.9% increase in profits, to $65 million last year, and sales in
Germany, France, and Italy are growing more than 9% annually. “In Western
Europe, I’d rather be in private label than in consumer branded goods,” Chief
Executive Mike Handley says.
While McBride thrives, some of the globe’s
best-known consumer brands are struggling in the Old World. European sales of
Unilever, the Anglo-Dutch maker of Dove soap and Lipton tea, have declined for
the past two years, including a 2.8% drop in 2004. Nestlé’s food sales in
Europe slipped 0.4% last year, while sales of its bottled waters such as Perrier
and Vittel dropped 8.4%. Food company Groupe Danone and beauty products maker
l’Oréal also are battling sluggish sales in the region.
Weak economic growth explains some of the
slowdown. But a bigger problem for the global brands is that retailers are
turning over more and more shelf space to their own labels. For example, the
global brands’ share of Europe’s bottled water market plummeted from 53% in 1997
to 40% last year, as retailers turned instead to private-label producers. “It’s
a trend we perhaps didn’t grasp as quickly as we should have,” says Carlo
Donati, a veteran Nestlé executive who recently took charge of the Nestlé Waters
division. In recent roadshows in London and New York, Nestlé top brass told
investors they would fight back by negotiating deals with discount retailers to
put more Nestlé products on their shelves. While that could boost sales, it
probably would squeeze the company’s margins.
Until recently, big global
brands didn’t lose much sleep over private labels. Indeed, one of retailing’s
worst-kept secrets for years was that house-brand products in grocery stores
were often produced by companies such as Nestlé, Cadbury Schweppes, and H.J.
Heinz , whose more expensive brands sat on nearby shelves. In the U.S, the
market share of private-label goods has stabilized at around 16%.
Europe’s private-label business is taking off like a rocket, fueled by the rapid
growth of discounters such as Germany’s Aldi Group and France’s Leader Price.
Their no-frills stores, which stock almost entirely private labels that
typically cost 20% to 40% less than name brands, have lured customers away from
longer-established retail chains such as Paris-based Carrefour and Royal Ahold
of the Netherlands. The big chains are fighting back by greatly expanding their
private-label offerings. Carrefour introduced a line of low-priced private-label
goods in 2003 that now generates $1.6 billion in annual sales. Ahold and eight
other European retailers have formed an alliance that negotiates with
private-label manufacturers on purchasing hundreds of products, from paper goods
to soft drinks, that are sold under the brand name Euroshopper.
are delighted. “I definitely buy more house-brand products than before. The
quality can vary, but I think for loads of things it’s great,” says Nicole
Pachot, 50, as she pops a bottle of Carrefour-brand shower gel into her cart at
a hypermarket in the Paris suburb of Créteil. The 250-milliliter bottle sells
for $1.67, vs. $3.27 for a comparably sized bottle of Dove shower gel nearby.
Retailers are happy, too, because private-label makers usually settle for much
narrower margins than the big-name manufacturers. That means wider margins for
the retailer, says Bryan Roberts, an analyst with the M+M Planet Retail Ltd.
consulting group in London.
Equally troubling for the big brands, the
private-label wave is sweeping into sectors such as cosmetics and baby products,
where customers used to be more wary of straying from trusted names. Among the
fastest-growing categories of private-label sales are lipstick, facial
moisturizers, and baby food, ACNielsen says.
range from small regional dairies and sausage makers to large-scale
manufacturers such as Berlin-based Freiberger, Europe’s biggest producer of
frozen pizzas. McBride, which started out supplying bottled bleach to
neighborhood markets in Manchester at the end of World War II, now supplies big
European chains such as Britain’s Tesco with everything from shampoo to
dishwasher soap, all packaged in sleek containers resembling those of
competitors such as l’Oréal and Procter & Gamble . “I can’t think of a major
European retailer that isn’t our customer,” CEO Handley says.
Not all the
big brands are hurting. Some, such as Coca-Cola and Mars candy bars, still
enjoy strong customer loyalty, analysts say. Although P&G doesn’t disclose
regional sales figures, it says European sales are growing at the same rate as
in the U.S., as the company has introduced popular products such as the new
Pampers Contour disposable diaper. And P&G hasn’t hesitated to flex its
pricing muscle. Last year, British private-equity group Candover Partners says
it wrote down an undisclosed portion of a $1.5 billion investment in Ontex, a
Belgian private-label maker of dis- posable diapers, after P&G clobbered
Ontex by slashing prices on Pampers in some markets.
EMERGING MARKET RIVALS
Instead of fighting the no-frills
retailers, some big brands are angling to join them. Nestlé already has a deal
with German-based discounter Lidl to sell Vittel bottled water in its stores.
Paul Polman, the head of P&G’s European operations, says that discounters
such as Lidl and Migros in Switzerland are starting to offer some of the
company’s brand-name goods. “The discounters don’t need to be a threat, they can
be an opportunity,” Polman says.
Still, Europe’s private-label boom is
the last thing global consumer brands needed. In the U.S. they’re increasingly
at the mercy of Wal-Mart Stores Inc.’s power to demand steep discounts on volume
purchases. They also face more vigorous competition from private-label brands in
emerging markets, from Poland to the Philippines. Hold onto your shopping carts,
folks — this battle’s just getting started.