Beer price war weakens profitability of current consumer goods retailers

Prices of diapers and baby food lowest in Europe due to competition

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The profit margins of Finnish current consumer goods retailers are falling. The weaker margins are primarily a result of tight price competition.
      Campaign products are currently being sold at clear losses. Antti Remes, the Chairman of the Finnish Food Marketing Association, explains that supermarkets aim to recover the losses through the prices of products that face less competition.
      Beer is currently the key item in the battle for customers. The arrival in Finland of German discount retailer Lidl in 2002 kicked off the price war, which was only accelerated after the cuts to alcohol taxes.
      Remes believes that the only way to normalise the situation would be to cut alcohol taxes even further, so that beer could be sold with a regular margin.
      For example, in the first half of April, beer sales were thirty percent higher than one year ago. However, the actual sales revenue was one quarter lower.
     
Beer is not the only product that is now subject to heavy competition. All the product groups that Lidl carries are sold with extremely tight or negative margins. Customers have benefited from sale prices for milk, diapers, and baby food.
      According to Harri Sivula, the Executive Vice President of Kesko Food, the prices of diapers and baby food in Finland are now the lowest in Europe. Some foreign retailers have even expressed interest in purchasing these items from Finland.
      One euro has bought consumers three to four litres of milk at times, which leads to losses of around fifty percent for the store. Sivula says that if milk is sold at less then 50-60 cents per litre, the revenue turns negative.
     
Project Manager Pertti Kiuru from LTT Research estimates that some of the Finnish current consumer goods retail chains will need to settle for operating profits of only two or three percent of net sales. According to Kiuru, an operating margin of five percent is decent in the industry.
      Small supermarkets are most affected by the beer war. Small stores do not have enough floor space for huge stacks of beer, so they are unable to answer the campaigns of larger outlets.
      In fact, the sales of small supermarkets fell by eight percent in March from the previous year.
      Breweries are active participants in the beer sales campaigns. Breweries themselves are engaged in a fierce battle over market shares, and have helped retailers provide low prices.


Previously in HS International Edition:
  Cut in alcohol tax brought prices down; last deflationary spell experienced in Finland in 1955 (15.4.2004)
  Milk war spreads to Helsinki region (30.1.2003)

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