Dec. 1 (Bloomberg) -- As Spaniards cut back on drinking in bars amid the economic gloom, Diageo Plc is giving them a reason to return: the draft mojito.
Faced with “markedly” declining volumes of their spirits in Spain, Diageo looked for a way to boost sales at bars and restaurants, where the majority of alcohol is traditionally consumed. The London-based company engineered its first-ever draft cocktails after consumers started increasingly drinking at home. The premixed drinks sell at less than 4 euros ($5.21), or half the price of a fresh cocktail.
As unemployment in the region climbs and Ireland follows Greece in getting a bailout, consumer-goods companies are bracing themselves for years of sluggish European growth. They’re now focusing innovation on value rather than on being able to command a higher price for an item amid OECD forecasts that the region won’t expand more than 2 percent in the three years through 2012, trailing the U.S.
“Growth will never be the same pace as before,” said Giovanni Ciserani, Procter & Gamble Co.’s president for western Europe. “The world has changed in the past four or five years. Consumers have become a lot more value-orientated.”
European shoppers are more prone to save rather than consume, and private-label products are a bigger proportion of the market than in the U.S., Laurent Freixe, head of Nestle SA’s European business, said in an interview. Nestle’s western European sales growth has averaged 2.5 percent over the past five years, excluding acquisitions, divestments and currency swings, compared with 6 percent in North America.
“Competition is extremely intense,” Freixe said. “We do see growth, but for the medium- and long-term, Europe will remain a relatively low-growth area.”
Nestle imported innovation from emerging markets to liven sales in western Europe. Its Maggi Juicy Chicken roasting bags that sell for a euro originated in Russia. They are one of three new products that have generated two-thirds of its growth in Europe. Nescafe Dolce Gusto coffee capsules and antioxidant-rich Nescafe Greenblend soluble coffee are the other two.
Over the past decade, the fastest-growing major Nestle brand worldwide has been Nespresso coffee. The coffee, which is sold only through Nestle-controlled shops and concessions, costs as much as 10 times unground espresso beans at Swiss supermarkets.
Nestle’s new products helped it drive European sales up 2 percent in the first nine months, excluding acquisitions, divestments and currency swings. Unilever’s western European sales fell 0.8 percent in the same period. The company reported “stagnant” growth in central and eastern Europe.
“European consumer-goods companies face a weak consumer, but it begs a question, and then what?” said Thomas Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania, which has about $400 million in Nestle stock. “If you have brand-leading positions, presence with the retailers, if you’re innovative and can keep your products on the shelf at a decent price, you can drive sales growth.”
Kraft Foods Inc. and Diageo have said they are trying to avoid price cuts. Instead, they’re introducing products such as Diageo’s Cacique Mojito. Diageo installed the first Cacique tap in a corner bar by its Madrid office in December; now 5,000 Spanish bars are selling the drink, said Alicia Garcia, head of the company’s innovation in Europe.
The company will introduce draft mojitos at 500 bars in the U.K. in the next few weeks, using Smirnoff vodka. The draft cocktails have been introduced in Greece and are being tested in Portugal. The drink has performed “very strongly” in Spain and has helped bolster sales of the Cacique brand as a whole.
“If you just look at price in this market, it’s just going to go one way,” said Mark Fisher, director of European customer marketing at Diageo. “We want to create value for our customers. People are asking: ‘Am I getting what I’m actually paying for?’”
Some companies and retailers are trying to repackage existing products to help persuade consumers they are getting more bang for their buck.
SABMiller Plc’s Grolsch brand is selling packs of beer in the U.K. with a code that allows consumers to rent movies online at a reduced rate for what it calls the “perfect night in.”
For Christmas, Waitrose Ltd., a U.K. supermarket chain owned by John Lewis Partnership Plc, is selling a cake kit containing flour, sugar, spices and dried fruit pre-soaked in brandy for 10 pounds ($15.6). The company said buying the ingredients separately for the recipe by television chef Delia Smith would cost more than 23 pounds. Bakers have to add butter, eggs and citrus zest at home.
Unilever has also focused on packaging, putting Stork margarine in tougher, longer-lasting plastic tubs, making them easier to store leftovers in, spokesman Paul Matthews said. The company, whose European sales have lagged the rest of the world for more than two years, has said they expect to be able to lift prices again in the fourth quarter.
“Main Street-man is under pressure and is likely to remain so for some time,” said Jon Cox, an analyst at Kepler Capital Markets in Zurich. “It’s the big guys, the Unilevers, P&Gs and Nestles who are doing a better job in innovation, the guys who have the budget to spend.”
Kraft’s re-sealable chocolate packaging keeps the product fresher for longer, according to Mike Clarke, the head of Kraft in Europe. “The family doesn’t have to finish that tablet in one go,” he said.
“You can either go two routes: provide low price, or provide value and convenience,” to attract customers, Clarke said. “We would rather provide value and convenience.”
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