Price War I Is Raging In EuropeBill Javetski
Life may imitate art, but sometimes art imitates economics. With four opera companies vying for customers in Paris these days, managers of the small Theatre des Champs-Elysees have found a simple way to compete with bigger rivals: They're cutting ticket prices across the board. Music lovers will soon be able to save as much as 10% off the going rate of about $95 a ticket to hear the world's top divas.
That leitmotif is sounding more and more often on Europe's business stage, too. The mere hint of an economic upturn used to trigger price hikes of 5% or even 10% to fatten up corporate bottom lines. But not this time. Today's European market, swamped with goods as trade barriers drop, is doing exactly the opposite: From airlines to retailers to manufacturers of finished goods, price cuts are the order of the day (table). The biggest winners are Europe's consumers, who so far haven't benefited much by the move to a single market.
Nowhere is the new order more evident than at Philips Electronics. Pressured by competition, the Dutch giant on June 17 warned investors to expect a poor showing in this year's second quarter. There's an ongoing fire sale of Philips products. As shoppers walk through the GB Maxi supermarket on Boulevard Leopold III in Brussels, for example, they can grab U.S.-style coupons offering discounts worth 10% to 15% off irons and deep-fat fryers.
CLONE WARS. The economic ripples go beyond temporary price cuts. With market unity nearly at hand, European companies are facing a revolution in the way they do business. Many companies will be forced to overhaul pricing strategies and protect markets through mergers. "What you're now seeing is a scramble for limited volume through price competition," says Marcus Grubb, an economist at UBS Phillips & Drew in London.
Take computers. Years ago, U.S. manufacturers and retailers suffered a pricing bloodbath because of the spread of IBM PC clones and low-cost distribution. The trend has finally migrated to Europe. Not long ago, European PC prices averaged 30% to 50% higher than U.S. prices. Now the differential is just 10% or less--barely enough to meet the costs of adapting U.S. products for European markets. For Olivetti, Europe's leading PC maker, that spells bad news. While the Italian company boosted unit sales in the first four months of this year, revenues fell 4%. Things aren't much brighter for big U.S. manufacturers such as IBM and Compaq Computer Corp.
Or take transportation. In recent weeks, carriers have broken their vows to resist the current round of transatlantic airfare cuts and jumped in. Lufthansa cut its business class fare on its Washington-Frankfurt route from $3,016 to $2,000 on June 9. And within Europe, carriers are turning to frequent-flier programs, a longtime U.S. favorite. The radical "open skies" program that the European Commission adopted on June 22 will next year permit all EC airlines to fly anywhere in Europe, which should touch off further fare wars. That would be welcome relief for passengers. A Paris to Athens round trip, for example, now costs a stratospheric $1,740.
The scramble is also on in automobiles. In Italy, Fiat has watched local market share drop from 53.8% in 1990 to 43.7% now, as competitors such as Ford of Europe Inc. have priced themselves into the auto makers' Italian stronghold. To fight back, Fiat this spring began offering such incentives as a $1,600 rebate on certain models and zero-interest financing.
MEGAMARKETERS. Europe's way of doing business through quaint small shops is also under siege. Shaking things up are hundreds of new, low-price superstores. In Britain, for example, Nevada Bob Ltd., an offshoot of the big U.S. chain, plans to double its six shops by next year and open another 20 in France, Germany, and Sweden within two years. Its selling power: discounts of up to 50% on some sports gear. And in France, two German food chains, Aldi and Lidl, are opening discount stores, forcing native retailers such as Carrefour to cut prices. Carrefour in turn is trying to squeeze suppliers. "We're hunting for cheaper goods all over Europe," says Carrefour President Michel Pinot.
At the same time, European consumers, burned by unemployment and debt, will keep the price pressure on. "Historically, you would just pass along price increases, and inflation would take care of it," says Ronald A. Miller, chairman of Scottish textile manufacturer Dawson International PLC. "Life," he sighs, "is not as before."
That's just what some single-market planners predicted years ago: that a one-shot effect of creating a borderless Europe would boost consumer real incomes. For business, it will "spur merger activity as a way to get economies of scale," says Michael Hughes, European strategist for London securities house Barclays de Zoete Wedd Ltd. To help sew up its home market, for example, French supermarket chain Casino in mid-June bought out competitor Rallye, which should boost Casino's revenues by 50%, to $12 billion annually.
As companies move to shore up local markets, the drumbeat of price competition is likely to get louder. Even if Europe's second thoughts about its broader future persist, the consumer benefits and economic growth spurred by lower prices should reassure Brussels that it's on the right track.
WHERE PRICES ARE PLUNGING AUTOS Fiat offers $1,600 rebates and zero-interest-rate financing in Italy on its $10,000 Uno compact COMPUTERS ComputerLand in Brussels cuts price of Compaq 386 PC by 40%, to $1,125 CONSUMER ELECTRONICS Philips is offering discounts on appliances, knocking 12% off a $53 coffee maker RETAILING Sport superstores slash the price of Titleist golf balls by 50%, to $22 a dozen DATA: BW