If Europe’s consumer industry is to become climate neutral by 2050, it will not succeed without brands investing heavily in sustainable innovation. Trade disputes with retailers will not help the cause, says brand association AIM.
Brands stand for innovation
With outspoken views on the perverse role of international retail alliances, European brand association AIM (the acronym stands for Association des Industries de Marque) regularly makes the retail news. The brand manufacturers’ advocate denounces practices whereby retailers band together to extort financial contributions from international brand manufacturers, on top of normal purchasing procedures.
A healthy competitive environment for brands is AIM’s focus, managing director Michelle Gibbons tells RetailDetail: a key area is defending brand manufacturers’ intellectual property rights, fighting counterfeiting. “By protecting brands, you also protect innovation. That is crucial for us, it is why we exist.” Founded in 1967, the organisation brings together 53 major FMCG multinationals and some 2,500 smaller and local brand manufacturers through 19 national associations, such as BABM in Belgium. It comprises a broad mix of branded manufacturers in food, beverages, personal care, household products and luxury.
Solar parks and packaging waste
Innovation will be key to achieving the EU’s sustainability goals by 2030 and 2050, says Gibbons: after all, this cannot be done without thorough research and development throughout the production process and supply chain. And that is where brands are taking the lead.
She refers to the huge solar farm that AB InBev opened in Spain last autumn, which means that the multinational’s beers in Western Europe will now be brewed with 100% renewable electricity. AIM itself is also participating in an ambitious project on digital watermarks to facilitate packaging sorting and recycling which requires systemic change. “Quite a challenge, I had never worked with waste management companies or recyclers before. We have to redefine packaging, reduce it, use different materials, change formats, adjust production processes. And how do we communicate that to consumers?”
European diversity
“At the same time, our brands do want to preserve their essence. They want to be able to keep designing their iconic bottles, for example, in a sustainable way. Think of the recognisable bottles for spirits or perfume: we don’t want to lose that creativity. That is one of our core messages: let’s ensure that we keep flexibility to innovate, because from innovation come solutions. We want to be able to use the QR code, for example, to inform consumers about the carbon footprint of products.”
Other important yards for brand manufacturers are projects around responsible sourcing, and digitalisation. “What can the metaverse mean for brands? The Data Act, AI? Online is an important channel…”
The European context does not make working together any easier. “Europeans returning from the US see that it is incredibly challenging to work here. Not only in terms of sustainability. The retail market here is completely different, you have totally different type of relationship between suppliers and retailers. You don’t have retail alliances in the US, for example. Now, I love the European diversity. I still drink Irish tea, after all these years in Belgium, but I also eat américain here, something you can’t get in Ireland.” But 30 years after the fall of the Wall, there is still no direct train connection between Frankfurt and Prague. That’s what the European project is about. And it takes a long time.
Vulnerable supply chains
Circumstances are not favourable either: after two years of Covid, there was the cost crisis. How big was the impact on the brand industry? “For the past 20 years, we were in a relatively stable, predictable mode, until 2020. Even the financial crisis did not have as much impact as what we experienced in the last three years. Our industry was always good at predicting consumer trends, we were always very agile, but on fairly stable fundamentals. Things could change but supplies remained assured, we kept producing. But now… You see the unrest, the strikes in France, the UK, Belgium… Inflation will continue to be an issue this year. That has an impact on everyone.”
So the challenges for manufacturers are huge: “Since the war in Ukraine, it has become clear how interdependent we are, with our complex supply chains. We knew about wheat, but we were previously unaware of how much glass comes from Ukraine, for example. Or machine components. Our supply chains have become so efficient that you can’t just call up another glass supplier. Labour shortages arose; there were a lot of Ukrainian drivers working in Europe, for example.”
Brands absorbed cost increases
Because of the way price negotiations are conducted, brand manufacturers could not immediately pass on the increased costs. “We absorbed much of the cost inflation last year and we will absorb even more this year. Whether consumer prices will continue to rise? Manufacturers are under pressure from rising input costs, but retailers set consumer prices. They have different strategies: their consumer prices are not just input-based, cost-based. Their approach is top-down and demand-driven.”
And the negotiating climate has not improved over the past year. “That’s a shame, because we should tackle challenges together. We are all here to serve consumers.” And consumer behaviour is also changing: “After Covid, people had savings and also felt like returning to their normal lives. Now you see consumers looking at their energy bills and watching their budgets.”
Concentration increases
According to recent figures from the PLMA, private label market share is at record levels, partly due to that high inflation. Will consumers return to A-brands when things improve again?
“There is always someone who can benefit from a crisis. Now private labels are doing very well, even though their prices are also rising. It becomes difficult to regain market share once you have lost it, we all know that. Will consumers return to their buying habits of the past, to the brands they liked? That will also depend on retailers’ strategies. Will they continue to focus on private label? What will they do with the brands?”
“Retailers monitor the price point of their private brands to make them more attractive. They decide which products to push. They are the owners of the shelf. And if you look at the market share of major retailers in Europe, you see how much more concentrated the markets have become. Those must-have shelves are in very few hands. In Belgium, Colruyt has more than 30 per cent market share and, as a brand, you cannot be missing from the shelves at that retailer.”
“Whoever owns the shelf has the power”
And then those retailers unite in international retail alliances, with enormous market power. Organisations like Epic Partners or Agecore have long been a thorn in the side of brand manufacturers. They do not buy jointly, but they demand “access fees” from manufacturers, in order to negotiate with their members. The classic argument of retailers is that they do need to unite, because multinationals like Coca-Cola or Unilever operate globally, while Colruyt, for example, only operates in Belgium, and a little in France.
“But Europe consists of different markets. You compete in the market where you operate. In Belgium, you compete in the same market as Colruyt. That’s why multinationals have local departments and experts there, you need that local consumer knowledge. How you fare as a multinational in the US has very little to do with Belgium or Germany.”
And you have players in Europe that are incredibly strong, relative to the size of their market. “Look at Edeka: they are in the top 20 retail chains in the world, even though they only operate in Germany, a country of 83 million people. Large consumer companies that operate successfully globally never have the weight that that one player has in Germany. That has an impact on bargaining power. If those big multinationals were really that powerful, why do they fall victim to delistings?” Whoever owns the shelf, has the power.
“Retailers are not charities”
Retailers accuse international brand manufacturers of dividing the European single market. In discussions about territorial supply restrictions – forcing retailers to source locally – Picnic and Ahold Delhaize recently stepped up the pressure. Magnum ice creams, for example, all come from one Italian factory, but there are price differences of up to 30% between different European countries, they say. How can that be explained?
“Well, how does Carrefour explain that there is a 72% price difference between their Carrefour Bio wafers in Belgium and in Spain? That product also comes from one supplier. Pricing is simply more than the sum of costs. You can’t compare all these different markets, can you? Look at the differences in volumes: Belgium is not France. Look, if there are issues, the competition authorities address them. In the report the Commission released in 2020, 17 of the national competition authorities saw no issues at all. So it would be good if we could see the facts behind the claims made by Ahold Delhaize and Picnic. Fact-based discussions are always a good thing.”
AIM is surprised that retailers get away with presenting themselves as the defenders of consumers so readily. “They are not charity organisations, are they? We would like the European Commission to crack down on these international retail alliances. They are not buying groups: they do not buy together. So what do they do together? They have really changed the market in recent years. And such organisations do not exist anywhere else in the world. That a group of competitors can come together and wield so much power is unprecedented.”
Working together to make the pie bigger
Is there enough hard evidence about abuse of power by those alliances? “Let’s turn it around: why is it so difficult to show that they are beneficial to consumers? Where does that access money go? Show us. The money that brand manufacturers pay to those retail alliances, they can no longer spend on green investments and innovation. This is becoming critical, especially among the smaller European players. Retailers are shooting themselves in the foot by undermining their suppliers. How are they going to meet their sustainability targets if we don’t innovate?”
Because that is the point, says Gibbons: this kind of discussion does not benefit anyone. “We need to go to net zero for the entire supply chain. Supermarkets can’t do that if they don’t do it together with the manufacturers. Their footprint is impacted by ours because we are on their shelves, just as our footprint is impacted by what happens upstream in the chain. Everyone should move in the same direction. We should all look at what makes us better in Europe, to make the pie bigger together. Unfair trade practices do not help in this regard.”
