In late 2001, Levi Strauss & Company, custodian of one of the world's most iconic brands, won a landmark case in the European Court of Justice to force Britain's dominant food retailer, Tesco, to stop selling its 501 brand of jeans at £30, well below Levi's £45 recommended retail price. The decision was hailed by "brand owners" as a victory in their battle to protect expensive franchises against the increasingly powerful and aggressive mega-retailers. However, by April 2004, and with the manufacturer's full support, Levi's new "Signature" brand jeans began appearing in a dozen Tesco stores in Britain, priced at just £25 (€37) a pair. Levi's may have won the legal battle, but Tesco—and other big retailers—have won the wider marketing war.
While the move by $4 billion (€3.3 billion) Levi Strauss to sell a cheaper range was seen by many as inevitable (indeed, belated), it also demonstrated vividly a power shift that has occurred over the last few years, particularly in Europe. The giant food retailers have, to a large extent, turned the tables on the brand owners, controlling customer information through new technology, developing their stores as strong brands in their own right, dictating price terms to suppliers and forcing profound strategic changes right through the supply chain. What's more, with relentless downward pressure on prices in Europe's largest industry, it is the finance chiefs of both the retailers and the manufacturers who are driving much of that change.
Even while it was engaged in its four-year struggle with Tesco, Levi Strauss, like many food and non-food manufacturers, had come to see that there was little point in trying to swim against such a powerful current. The San Francisco-based jeans maker, with Philip Marineau, a former PepsiCo and Quaker Oats executive, installed as a "turnaround CEO" in 1999, had already begun devising a strategy to sell a cheaper range of jeans through discount food and general retailers, starting with Wal-Mart in the US last year. "We realised there was a potentially valuable market out there. And we realised that, in Europe, it was the big retailers that would set the prices; we were not going to set the prices," says Cedric Jungpeter, Levi's spokesman in Europe.
Levi's also realised that this would mean a change in its manufacturing strategy. It had to cut its world-wide workforce by a fifth, close plants in western Europe (Belgium, France and Scotland) and North America (the last plants in the US and Canada were shut earlier this year), and contract out production to places such as Turkey, Hungary, Poland, Mexico and low-cost Asian countries. It is still reckoning the cost of the restructuring, which is already running into the hundreds of millions of dollars.
For Levi Strauss, selling through the discount retailers is imperative in order to move back into the black and pay off its massive debt, but it also risks eroding control over its brand, its customers and its pricing policy. In February, Apparel magazine wrote, "Everything that made Levi's into an American icon—quality, durability and originality—has been left out of the updated recipe. The Signature line is but a shell of the brand's former self—Levi's in name only."
The strategic consequences of this loss of brand control to the retailers have been a major concern of manufacturers since at least the mid-1990s, when they were first articulated by academics.
Pile Them High
Retailers are the flip-side of this coin—wresting control of consumer behaviour is a key objective. At Tesco, aggressive price competition has been at the core of that strategy, especially since Andrew Higginson took over as CFO in 1997 (under CEO Terry Leahy, who took the helm the same year). And the strategy has worked. Tesco's share price went from £1 in 1997 to £2.50 by last month. Pre-tax profit for the 53 weeks to February 29th 2004 was £1.7 billion on sales of £34 billion, up from £955m pre-tax on sales of £20 billion in 2000. It is now Europe's second largest food retailer, after Carrefour of France, and the world's fifth largest. To get to that position, Tesco first had to get over a few bumps.
"We had our 'road to Damascus' moment in the early 1990s, when the weakest players were considered to be Tesco and Asda [now part of the Wal-Mart empire]," Higginson recounts. "It was out of that adversity that the UK. strategy was born. That strategy was to say, 'Price is much more of a given in people's shopping pattern.' Twenty years ago, they were happy to spend more to shop in a nice environment, or to shop in a 'grotty' environment for a good price. In the early 1990s, they wanted it all—good prices, good services, good environment. And that coincided with the death of inflation." It also helped that leading competitors, such as Sainsbury's, "were less sensitive to that trend, whereas we were desperate."
Over the past decade, the price pressure in UK food retailing has been intense. The pressure came first from the encroachment of the German discounters, Aldi and Lidl, and then from Wal-Mart's acquisition of Asda. Following last year's takeover of Safeway by William Morrison, retail specialist Verdict Research predicts that food prices in the UK will fall by 0.1% in 2004, after a rise of just 0.8% last year. And price pressure is just as acute in Europe's other large markets, where sales growth has been weaker.
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