Recovery in the West, Deterioration in the East

The first quarter of 2010 shows a positive trend in nominal value growth rates in most countries, which was driven primarily through volume growth improvement. France’s 2.4% year-on-year nominal value increase was the result of inflation while Portugal’s 4% volume growth and Spain’s 3% volume growth can both be attributed to a decline in deflation. Hungary and The Czech Republic were the poorest performers in the region, reporting nominal value declines of 3.5% and 3.2% respectively.

With a marginal reduction in shopping trips in the first quarter across Italy and Germany and flat overall spending per trip in the top five European countries (Germany, Italy, France, United Kingdom and Spain), shopping behavior is stable, but shows no significant improvement.

However, the economic turmoil reached Eastern Europe with a 12-month lag. In the latter part of 2009, these eastern markets severely deteriorated with volume decreases occurring in Latvia, Lithuania, Russia, Serbia and Ukraine. Albania, Bosnia and Macedonia remain the positive exceptions. With this sudden and delayed worsening in the east, a steep upturn will now be necessary to return to full recovery.

Europe Total View Q1 2010

Positive Growth Trends
Across Europe, nominal value growth continues to climb, increasing to 4.1% in the first quarter of 2010, a 1.2 percentage point gain over the fourth quarter 2009. The steady gain in volume coupled with latter unit value growth has kept Europe on an uphill trend with momentum continuing to build from the low point in the third quarter of 2009 when nominal value plunged to 2.6%.

The volume growth rate accelerated in most countries: Norway (7%), Finland (5%), Sweden (4%), Portugal (4%), Slovakia (4%), Austria (3%), Ireland (3%), Italy (3%), Spain (3%), Belgium (2%), Poland (2%), Switzerland (2%), Denmark (1%), France (1%), Germany (1%), Netherlands (1%) and U.K. (1%). Both volume and unit value declines were reported in Hungary, Czech Republic and Greece.

Country Analysis—A Divided Europe
The latest quarterly Europe Growth Reporter measuring volume and value sales in the fast moving consumer goods industry across markets in Europe is showing encouraging signs of improvement with all but four countries measured recording positive volume trends, which have helped drive increases in nominal value growths across the region. Unit value, however, shows an even split, with increases reported in eight countries and declines shown in eight. Four countries report flat unit value.

Turkey shows the most significant spike in unit value, increasing 21% since last year, which has unsurprisingly lead to volume decline (-1%). Russia has experienced double digit growth in unit value (+11.4%) once again and here volume declines remain significant (-7.2%), though they are slightly improved from Q4 2009 (-8.7%). The Nordic countries of Norway and Finland report the greatest increase in volume, rising 7% and 5% respectively, driven by deflation in Finland and low unit value growth in Norway. Sweden also reported low unit value growth although volume growth was lower here at +4%.

About the Nielsen European Growth Reporter
This report compares overall market dynamics (value and unit growth) in the fast moving consumer goods sector across Europe. It is based on the sales tracking Nielsen performs in every European market, and covers sales in grocery, hypermarket, supermarket, discount and convenience channels.

The report is based on the widest possible basket of product categories that are continuously tracked by Nielsen in each of these countries and channels, and this edition reports on week two of 2010 through to week 14 of 2010.

Jean-Jacques Vandenheede, European Business Insight Director

SUMMARY: Drawing on Nielsen’s unique data assets and geographical footprint the European Growth Reporter compares overall market dynamics (value and unit growth) in the Fast Moving Consumer Goods sector across Europe.

Based on the widest possible basket of product categories that are continuously tracked by Nielsen in each of these countries and channels, the fourth quarter 2009 shows nominal growth, which has remained stable since the prior quarter, and around 3% for four consecutive quarters.

The fourth quarter of 2009 has shown nominal growth at 2.9%, a stable growth rate hovering around 3% for the year, once again outperforming the United States which ended the year with a 0.6% nominal growth rate. European inflation remained low at 1.3% in the fourth quarter. Deflation held at the -5% level in Slovakia, Finland and Portugal.

Europe experienced higher volume increases in 2009 than the prior year, increasing by 0.6% to 1.6% in the fourth quarter. Volume growth is accelerating in Austria, Finland, France, Ireland, Norway, Spain and Turkey.

The Big 5 European economies (France, Germany, Italy, Spain, United Kingdom) ended the year at various stages of recovery. France and Spain recorded solid volume improvements while Germany and Italy stayed close to the zero line. Value growth in the United Kingdom reached the 5% mark with 3% points of this coming from volume increases.

By year end, 2009 performance delivered better volume growth than 2008. The best volume improvements came from the United Kingdom, Sweden, France, Austria and Germany. Offsetting those gains were volume losses recorded in Switzerland, Slovakia, the Czech Republic and Poland.

Total European View

Nominal Volume Growth
Across Europe, nominal volume growth inched up to 2.9% in the final quarter of 2009, gaining 0.3% point over the third quarter. This small gain in volume places European volume growth ahead of the United States which saw volume drop by -1.2% in the fourth quarter.

The volume growth rate is accelerating in the following countries: Austria, Finland, France, Germany, Netherlands, Norway, Poland, Portugal, Spain, Sweden, Turkey and the United Kingdom.

The Big 5 European economies are showing a mixed picture. While France, Germany, Spain and the United Kingdom recorded volume gains over 2008, Italy lost ground.

Ireland, Slovakia, Hungary and the Czech Republic recorded the greatest volume declines in 2009.

Value Growth
Unit value growth fell precipitously from 5.7% in 2008 to 1.5% in 2009, underperforming the prior year in every single quarter of 2009, reflecting slowing inflation and price compression implemented at retailers as a result of economic pressures.

Country Analysis—Western Europe
The latest quarterly Europe Growth Reporter measuring volume and value sales in the fast moving consumer goods industry across markets in Europe is showing encouraging signs of improvement with more than half the countries measured recording positive volume trends. 2009 volumes increased to +1.7% in 2009 from 1.1% growth in 2008. This is still some way from 2007’s 3% growth rates; a slow but steady improvement.

As the chart above demonstrates, the leading Western European growth countries in fourth quarter 2009 were Turkey, Norway, the United Kingdom, Poland, Sweden, France, Austria, the Netherlands, Belgium, Spain and Switzerland.

About the Nielsen European Growth Reporter
This report compares overall market dynamics (value and unit growth) in the Fast Moving Consumer Goods sector across Europe. It is based on the sales tracking Nielsen performs in every European market, and covers sales in grocery, hypermarket, supermarket, discount and convenience channels.

The report is based on the widest possible basket of product categories that are continuously tracked by Nielsen in each of these countries and channels, and this edition reports on week 41 of 2009 through to week 52 of 2009.

Todd Hale, Senior Vice President, Consumer & Shopper Insights, Nielsen U.S., Jonathan Banks, Director Retail Insights, Nielsen Europe, James Russo, Vice President of Marketing, Nielsen U.S., Jean-Jacques Vandenheede, Director Retail Insights, Nielsen Europe

In what areas of the world, have you seen the most significant changes?

Jonathan Banks (JB): We have already seen a big reduction in shopping trips in European countries since the first quarter of 2008. In Australia, the convenience channel heavily depends on travel to gas stations and there is a strong correlation between gas prices and their store performance. Also Australia saw a faster than expected growth in the discounter channel due to the expansion of ALDI. They succeeded in marketing an offering that consumers perceive to be competitive with the supermarkets on both quality and price. Around the globe, discounter growth was highly correlated with the growth in store numbers, though we now see in some countries (e.g., United Kingdom, Germany and Netherlands) like-for-like growth moving ahead.

Jean-Jacques Vandenheede (JJV): While the surrounding conditions in each market are different, everything today has to do with value. Consumers are flocking to good deals and they are taking advantage of the aggressive sales being offered. However, we have noticed a four to six month delay between the media hype and the resulting consumer behavior. Meaning this: it could get worse before it gets better. Since food is relatively recession resistant, consumers are mainly saving money by cutting back on non-essentials, such as perhaps only taking one holiday instead of two.

James Russo (JR): In the U.S., consumers have been preparing for a recession since the fourth quarter of 2007, according to a Nielsen Global Consumer Confidence survey. However, the most dramatic change in behavior aligns with the severe drop in economic and financial conditions that took place in September 2008. While there are areas of the U.S that are more affected than others, this recession—unlike some others in the past—is broad-based across all income groups. Lower-income households are feeling the pressure of the labor market, housing and credit restraints, and upper-income households are watching their net worth decline, which is most visible in their retirement pensions and housing.

Todd Hale (TH): In the U.S. retailing market, the big surprise has been the severity of shifts from nice-to-have to need-to-have assortment and retailing. In 2008, sales results for discretionary retailers (those serving both high- and low-end consumers) saw their shopping trips and dollar sales plummet in 2008, and sales results for many food categories and food retailers were obviously much better. As a colleague succinctly put it, “if you can’t eat it, you don’t need it”.

What are retailers doing to cope in difficult economies?

JJV: Interestingly, retailers are grasping at basic block-and-tackling methods that place emphasis on resisting price increases, making concessions towards quality, focusing on promotion, investing in private label and negotiating with suppliers on margin increases.

JB: One of the most newsworthy events in the United Kingdom was the closure of the British icon Woolworths. While the economic pressures are affecting a spectrum of retailers, those poor-performing retailers—before the recession—are the ones struggling most. A development to watch is the utilization of Information Technology (IT). As IT continues to get less expensive and more effective, there will be opportunities for increased collaborative buying and sourcing. There is an opportunity to increase savings in times like this, and getting more with what you have is a good investment. Expect to see private label’s share advance more quickly in some categories, in some countries.

JR: Retailers are taking steps to address consumers’ strong desire for value, through their merchandising, marketing and advertising programs. There is a renewed focus on driving return on investment, getting more out of what they have and understanding opportunities (consumers, categories) at an increasingly granular level.

TH: U.S. retailers are placing a strong emphasis on value and their private label programs. In the past year, Kroger has gone head-to-head with Walmart with matching prices on food basics such as bread, milk, eggs, and bananas. On the heels of Save-A-Lot’s successful “Fuel your family for less” program, other grocers have implemented their own “Feed a family of four for $8.00/$10.00 per meal” programs. With a decline in commodity prices, grocers like Wegmans and Giant Eagle (Pittsburgh) have advertised price cuts across their stores.

From the consumer packaged goods executives you have spoken to, what is their level of optimism?

JJV: Caution and uncertainty are the operable words to use. Executives are planning for the worst and hoping for the best. Rather than over-reacting to the conditions, they are looking for segments of opportunity wherever they can be found. All the market indicators we are tracking show that the markets are holding. The majority of the categories are showing positive volume growth in Q4 of 2008.

JB: Now is not the time to slow down and pull back from brand development. Think about how long it takes to get a new product through the pipeline. From a new product development point of view, marketers should have reduced their efforts two years ago if they wanted to be less dynamic through the downturn. History tells us that really great brands have been launched in the middle of recessions where advertising can cost less.

JR: As we speak to hundreds of manufacturer and retail executives, 2008 was clearly a year of uncertainty. Questions such as; how bad is the recession going to be, how long will it last, and what do we need to know were on the minds of every executive. In 2009, the discussions are starting to turn towards: How do we plan for a recovery? What is our exit strategy to assure growth in an up market? Should we increase our advertising and marketing spending? Positive developments will come as many of these plans will take months to execute. Companies need to stay ahead of the curve.

TH: CPG manufacturers have a more pessimistic outlook on 2009 than most retailers I have spoken with. However, many manufacturers do see opportunities to at least hold firm on their marketing spending. While big retailers like Target, Walgreens and Walmart announced plans to reduce store expansion in 2009, they are still expanding and investing in new formats. The same is true for a number of other national and regional grocers as they look for opportunities to test or open new formats and find new locations to expand their footprint.

What are the biggest opportunities for consumer packaged goods manufacturers and retailers in 2009?

JB: Sustainability remains an extremely important long-term trend as opposed to a fad. Today, ethical companies can use this platform as a differentiator. Within three years, it will be expected and opportunities to promote it will diminish as ‘doing the right thing’ becomes the norm.

JJV: Now is the time to plan ahead and develop an exit strategy out of a crisis. Look at all potential pitfalls and determine a plan to turn things around. Not planning for an exit strategy is actually slowing down the recovery.

JR: The biggest opportunities will be found by aligning with the deepening consumer behaviors that have been occurring since the beginning of 2008. As the economy slows, these behaviors will intensify. Some of these behaviors include:

• greater at-home related opportunities;
• fulfillment of basic over discretionary needs;
• pervasive trading down;
• variety and convenience taking a back seat to value.

TH: Consumers have told us how they are staying home more often and consuming more meals at home or at work. This speaks to meal solution opportunities for food manufacturers and retailers. In addition to the “meal deal” promotions many grocers have implemented, there are opportunities for at-work meals and other meal solutions. One example is ConAgra’s new line of microwave meals. New product opportunities can come to those manufactures that provide a product that delivers real benefits. Value messaging is another strategy coming out loud and clear, such as Kraft’s TV advertisement that compares the size and price advantage for Velveeta cheese with a block of cheddar cheese.

While unit sales of many non-food, health & beauty aids, and general merchandise products fell in 2008, the fact that consumers may be spending more time at home speaks to opportunities in these categories too. Procter & Gamble is a good example of successfully positioning some of their health & beauty brands against higher-prices department store or beauty salon offerings.

What is the one development that has surprised you in 2008?

JB: What surprised me most was the high level of debt families accumulated. Too many families are living beyond their means. Whilst the credit crunch was predicted by some, a good reminder to us all is that in economics, what should happen, usually does…eventually!

JJV: The number of businesses that have been operating beyond their “natural” means—the overuse of incentives, promotions, etc.—has pushed the environment to a limit. Those companies who were healthy before the recession hit will thrive. The ones who were already struggling have been hit harder. Like the athlete who uses prohibited drugs to stretch beyond their physical limits, when corporations operate beyond their means, it is only a matter of time before they will get caught.

JR: The potential for a fundamental shift in consumer behavior is most surprising. This recession is not a cyclical decline and subsequent recovery back to norms. The fundamentals that drove consumption for the past 10 years—most notably, the housing and credit markets and the way households overleveraged themselves—have abated. It is almost as if we are turning back the clock to the 1980s or early 1990s where households start to save and become more fiscally responsible in their consumption habits. And while there is long term gain associated with these behaviors, in the short term, we are looking at a slower, very moderate recovery for potentially the back half of 2009 or early 2010.

TH: What surprised me most was how escalating gas prices—which rose above four dollars a gallon in the first half of 2008—and the mid-September collapse of financial markets had altered the shopping and spending habits among those with higher incomes. These consumers have led the growth in shopping trips to value retailers such as dollar stores and supercenters.

Secondly, the decline in retailer spending and shopping within discretionary retailers, such as apparel, electronics, office supply, department stores, etc., in 2008 has been unprecedented. This trend will continue in 2009, as virtually every major industry (from automotive to housing to restaurants) will continue to experience weak sales in 2009. However, it is hopeful that a U.S. economic stimulus program will be implemented by the second half of 2009, which should drive more consumer spending and make 2010 a better year.