All is not well between retailers and manufacturers. While the former continues its power march forward, the latter are often stuck paying the bill. Global sourcing and global promotions - as executed, for example, by the three most global retailers Carrefour, Ahold and Wal-Mart - and EDLP strategies are causing concern. The source of all the aggravation? Consolidation.
Elsevier Food International, Vol. 4, Number 1, February 2001
Pascal Kuipers

The continued consolidation in retail, stimulated by companies such as Ahold and Carrefour, presents an enormus threat to the food processing industry.
So does Wal-Mart's entry onto the European market. It has everything to do with the buying power among retailers, which has increased to such an extent that they are already in a position to dictate the terms to their suppliers. Similarly, retailers are able to put food processors' prices under pressure and to demand further promotional support for their branded products in addition to listing charges.
These are the conclusions outlined by KPMG Corporate Finance in its mid-2000 survey of 90 companies in the European food processing industry. Despite all efforts to increase the level of trust and technology between retailers and manufacturers, and to offer a more efficient service to consumers, and regardless of the fact that Wal-Mart is obviously having more trouble in Europe than initially expected, the most revealing aspect of the survey is that the days of power play are far from over. This is especially the case in France and Germany, notorious for their difficult relationships between retailers and manufacturers. Today, retail consolidation is considered to be the largest threat to the growth and profitability of a manufacturer's business.

Rising threat
One of the greatest threats comes in the form of the 'everyday low price' strategy. Already adopted by large retailers like Tesco in the UK and Metro AG and US retailer Wal-Mart, discounters like Aldi and Lidl have recently jumped on the bandwagon. According to the survey, 70 per cent of European manufacturing CEOs consider everyday low prices a moderate/great threat. In France, the low price strategy and private labels are a cause of concern for over 85 per cent of the country's CEOs.
Other sources of worry amongst senior executives are global/European sourcing and pan-European/global pricing. According to the CEOs surveyed, these put even greater pressure on prices and margins. Large retailers are becoming pan-European at a faster rate than food manufacturers, which, together with the pan-European/global sourcing requirements, is creating problems for local suppliers. On the other hand, this also creates additional opportunities for some of the larger suppliers as they consolidate their positions. Pan-European/global pricing demands are considered a threat primarily in France, Italy and the United Kingdom.
According to the UK Institute of Grocery Distribution's (IGD) Global Retail Index, Carrefour and Ahold rank number one and two respectively in global retailing. The Global Retail Index takes both 'hard' and 'soft' factors into account. Hard factors are defined as turnover, number of countries of operation, level of presence in key regions (Western Europe, North America, etc), dominance of the domestic market, and the share of foreign sales in the company's total sales figure. Soft factors are defined as clarity of global strategy, global culture, and the level of global sharing and learning within an organisation. Though boasting the largest sales figures, Wal-Mart is ranked third. Like Wal-Mart, both Carrefour and Ahold have proven experience with global promotions and both are actively pursuing global sourcing initiatives. The difference is that Wal-Mart's foreign presence is limited to nine countries, while Carrefour and Ahold are active in 25 and 24 countries respectively. Hence their high rankings.

Rising costs
Private label is hardly a new phenomenon, yet food processors still consider it an important issue. This is because, according to the KPMG survey, these low-priced, often premium brands, combined with the increasingly expanding 'value lines', are a source of the power retailers currently have over branded food producers. The survey cites examples of brand leaders being de-listed for not meeting all of the retailer's trade terms.
The consequence of all this is that it is becoming more and more difficult for manufacturers to pass on price increases to the retailers. They are forced to foot the bill for rising costs of transportation, employment and raw materials. Transport costs alone are a key concern for 80 per cent of UK CEOs and 65 per cent of their counterparts in Spain, the Netherlands and France. Though regulations related to food standards/hygiene are not high on the concern list (the study was carried out just prior to BSE crisis), French and UK CEOs noted that food standards and animal welfare are key issueimpacting on their businesses. Noteworthy is the virtually universal problem of not being able to attract and retain bright young executives, who are seen as critical to success in what is increasingly becoming a service-oriented industry. Approximately 70 per cent of European CEOs see this as a moderate/great threat. Given the rate of growth and salary packages available in the telecom and technology sectors, this doesn't come as a surprise.

Aggressive response
The question, however, is how manufacturers will respond to all the factors responsible for such a gloomy perspective. According to the survey, senior executives plan to respond aggressively to the anticipated growth malaise and the continued pressure on margins. Key to their strategy will be, as always, innovation, their main weapon against powerful retailers. Paolo Barilla, vice president of the Barilla company and president of the European Brands Association AIM, stresses this in Brand Vision of this edition of Elsevier Food International.
Not surprisingly, 97 per cent of those manufacturing executives surveyed said they were quite or very likely to innovate their existing product areas. Noteworthy is that 87 per cent of German CEOs are keen on innovating. While this should enable food producers to meet sophisticated consumer demands, it is also likely to result in an overall increase in R&D spending.
Although private label production is generally considered a growth area, there is a preference among food producers to focus on proprietary brands, except in France where there is a small preference for private label products, and in Italy where CEOs are most focused on increasing private label investment.

Manufacturers' consolidation
European food processors are trying to position themselves strategically to meet the challenges of the future. They are typically employing two basic strategies to achieve continued sales and earnings growth. First, larger companies in more moderate growth sectors like meat, confectionery and dairy are focused on leading the consolidation in their industries. Examples of this are Arla Foods in dairy and CSM in confectionery. The latter announced on December 20 last year that it would sell its food division to HJ Heinz Company. CSM wants to focus on its core activities, ie, the manufacturing and sale of bakery supplies, sugar confectionery, sugar and lactic acid and lactic acid derivatives.
The second strategy is to focus on higher growth areas. The intended exit of Wessanen (like CSM, a Netherlands-based multi national manufacturer) from the dairy sector and Geest's exit from bananas in order to focus on convenience foods are good examples of this strategy.
Consequently, the consolidation in the European food processing industry is likely to accelerate. Approximately 69 per cent of the CEOs surveyed think it likely that they will make acquisitions in response to the threats facing them. Furthermore, four out of five respondents believe at least some consolidation in the food processing industry is likely over the next 12 months. Over three-quarters of CEOs also believe it likely that competitors from outside the EU will enter the EU market through acquisitions.
One issue raised by many CEOs is the difficulty in finding desirable acquisition targets at an affordable price, though this is seen as less of an issue in Spain and France. In addition, 74 per cent of CEOs said it is very/quite likely that they would diversify into new product areas.
While most CEOs expect some level of consolidation, there is disagreement about the impact that consolidation will have on the industry. Around 40 per cent of the respondents believe the consolidation process will have a positive impact on their company. The Netherlands and the United Kingdom were particularly positive. Another 40 per cent doesn't believe the consolidation process will have any impact, particularly in Germany and Italy. CEOs from France and Spain are the most negative on the impact of consolidation on their businesses. According to those surveyed, the primary benefits are a more structured market environment, as well as a greater economies of scale. The disadvantages are increased price competition and market destabilisation during the consolidation phase.