Western Europe Retailers Meet in the Middle
By Brenda Russell
Consumers in Western Europe’s patchy economic recovery are rethinking their views on price and value, and rewriting the rules for fast-moving packaged goods.
“Shoppers react quite differently to the ongoing economic uncertainty,” says Jacques Dupre, senior insight director in France for consumer data firm IRI Worldwide. “In France, for example, where we have seen price deflation, consumers are using this as an opportunity to trade up to better quality products.”
Brands launched new products in France as Leclerc, Casino, Carrefour and Auchan extended their price wars. As a result, national brands grew volume sales last year by more than 2 percent. Private-label volume decreased by more than 2 percent.
“Over in the United Kingdom, however, prices have been going up faster than wages since the recession began, and people have been buying lower-priced products or seeking out more on promotion—i.e., downtrading,” Dupre says.
Yet private labels in Britain failed to cash in: Price cuts and promotions helped brands hold on even as discounters Aldi and Lidl made inroads in the insular English market.
“The continuing price war between UK retailers in the battle against the discounters has been bringing the opportunity to consumers to save even more,” Dupre says. “And they seem to be taking it.”
A cheaper euro and lower oil prices bring what the European Commission calls “economic tailwinds.” In May it raised its European Union estimate for real increases in gross domestic product, to 1.8 percent for 2015 and 2.1 percent in 2016. But Dupre and other analysts view many countries as still in recession.
“Some of the world’s biggest brands and retailers are caught up in a battle for consumer purchases that threatens to engulf the whole of Europe,” Dupre says. FMCG market is growing very slowly, “and we’re starting to see the same deflation trend in Italy and Spain too.”
Daniel Latev, analyst at Euromonitor International, says discounters have broken into England. “With the recession,” Latev says, “UK consumers have noticed this channel.”
Discounters have made these inroads by moving toward the middle. “It’s all about value for money,” says Richard Perks, director of retail research at Mintel.
“Aldi and Lidl used to use the hard-discount format: 650 lines, ultra-low price, all off brands, cost base cut to absolute bare minimum,” Perks says. “But it didn’t work particularly well. It didn’t catch the consumer’s imagination.”
Now discounters have nearly doubled their lines, adding branded products to attract supermarket shoppers. “You can buy Coca-Cola there now if you really want to,” Perks says. “They’ve really boosted their premium offer and their fresh food offer. Plus, in doing that they haven’t really compromised their cost basis much.
“It’s still pretty basic,” Perks says. “It’s not a great shopping experience but people like it, and because it’s changed, they can really now relate to it more than they used to.”
Tighter budgets also give convenience stores new momentum across Europe, filling in gaps between payday superstore trips. Planet Retail estimates European convenience and forecourt sales will grow 5.3 percent between 2013 and 2018, the fastest of any category.
“Consumers are preferring to shop more, often buying smaller shopping baskets,” Latev says. Turkey and the UK are showing the highest growth in absolute terms. Spain is the only large market where convenience and superstores aren’t battling for the fastest growth.
“All big retailers are investing heavily in the convenience stores at the moment and growing the number of stores at the expense of independents and small grocers,” Latev says.
Car costs and a dearth of parking make it harder for younger Europeans to pick up the big-box bug.
“It’s very, very difficult to get onto the housing ladder, I think, in most European countries,” Perks says. “So young people are tending to look at inner cities, buying flats or they’re renting flats. And if you’re living in that sort of accommodation then you are much, much more likely to use the local convenience store than you are to make the journey to a superstore.”
The winners in this battle vary from country to country. “Hypermarkets are expected to grow strongly in France, Italy and Sweden in the next five years,” Latev says. “For example, in Italy the channel is still relatively underdeveloped, and there has been investment by retailers in this channel.” New investments in France’s lagging superstores make them more competitive in terms of product selection and price.
Neither manufacturers nor retailers will be winners in an ongoing price war, Dupre says. “While lower prices may be good news for shoppers, they are likely to be impacting manufacturers’ margins,” he says. “Developing appropriate strategies around product assortment, innovation and a focus on long-term growth not short-term gains is the only way forward.”
Private labels, traditionally a value option, are one casualty of eroding prices. Dupre sees a slowdown in the segment, and in some countries, a decline.
Tim Eales, strategic insight director at IRI Worldwide, marks a closing price gap between national and own brands in a report, Private Label in Western Economies. Retailers have reduced promotional levels on some private label goods, while brands are promoting heavily.
“Private label appears to have reached a ceiling in places like France, Spain, Italy and the Netherlands,” Eales explains via e-mail, “with value share slowing down or even in decline for the first time in seven years.”
Private label market share in Europe dropped by 0.1 percentage point in unit and value from a year ago, down to 38.7 percent of all value sales and 48.9 percent in unit sales. This is still a significant proportion of the total market, Eales says: “In most European countries, private label’s decline is coming from the food sector.”
While a year ago only France saw private label sales decreasing, he says, this year France, Italy, Spain and the Netherlands have all seen a slowdown and even a decrease in private label share.
Frozen food and chilled/fresh food have the highest share of value sales for private label. Confectionery, with strong brand competition, has the lowest private-label presence.
Private label is strongest in the UK, with more than half the market in value, but only 15.4 percent of the market in Greece. Germany shows the most private label growth, up 0.7 percentage point in value share and 0.1 percentage point in unit share, due to improved quality and more promotional activity
Private label share continues to shrink in France, by 0.5 percentage point in value and 0.9 percentage point in units, with retailers reducing private label assortment and increasing national brand promotions. The category is flat in Italy and falling in the Netherlands. In Spain the category suffered its first share loss since the recession, down 0.7 percentage point in value share and 1.2 percentage points in unit share.
Price is not the only influencer in purchasing, but also convenience, value for money and exclusivity.
“Private label is now in a mature stage and retailers are moving away from aggressive promotions activity and discounting,” Eales says. “In fact, price levels have risen to meet the growing demand by consumers for better quality and premium products.”