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 (NSRGY ) 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 (DA ) and beauty products maker l'Oréal (LORLY ) also are battling sluggish sales in the region.

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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 (HNZ ), whose more expensive brands sat on nearby shelves. In the U.S, the market share of private-label goods has stabilized at around 16%.

But now 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 (AHO ) 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.

Customers 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.

Private-label companies 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 (PG ). "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 (KO ) 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 (WMT ) 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.

By Carol Matlack, with Rachel Tiplady in Paris

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