TIME EUROPE
DECEMBER 13, 1999 VOL. 154 NO. 24
Buyer Beware
Europeans are getting mad as hell about prices. But the euro, the Internet and mass market retailers will bring them down
By ELIZABETH GLEICK London
To the average German shopper, the Wal-Mart in Dortmund appears to be what passes for paradise in the waning days of this century. The produce section is a cornucopia of color and mouth-watering displays of fresh fruit salads on glistening beds of crushed ice. The smell of warm chocolate muffins wafts over from the in-store bakery. Shop assistants wearing eye-popping blue vests and happy-face pins greet the customers with a smile; usher them to the item they desire; even--and here the German mind boggles--pack their purchases into free plastic bags.
All that efficient good cheer, combined with spotless, well-lit aisles wide enough to drive a car down, would be enough to attract swarms of curious customers to this 19,000 sq m superstore, which opened two years ago. But the cash register totals make it a repeat destination. Oreo cookies--$5.40 in Bonn's Kaufhof foodhalls--are $1.50 here, a savings of more than two-thirds! A jumbo pack of Pampers for $27, instead of the usual $35? A 375-gram box of All-Bran cereal for a mere $2.10? "Prices are really low here," says taxi driver Abdullah Canlioglu. "Not only food but bigger, branded articles such as electric appliances as well. That's why my wife keeps telling me she wants to go shopping here." Some Saturdays Canlioglu borrows a car and brings the whole family for a full day of superstore fun.
So far the American giant Wal-Mart--which took over 21 Wertkauf outlets at the end of 1997 and 74 Interspar stores at the end of 1998 and this summer absorbed Asda, the U.K.'s third-largest supermarket chain--has only created four of these gleaming emporiums, all in Germany. But their presence, and the possibility of more to come, is putting additional pressure on a German retail climate already suffering from minimal growth: sales increases in the industry are now down to around 1% annually. The country's largest superstore chain, Metro AG, has got into the low, low, low price-cutting fray, and its clerks are now being instructed to smile. Says Gerd Härig, chief manager of the Federal Association of German Grocery Retailers: "Wal-Mart has caused German companies to watch it like a rabbit does the snake: What is Wal-Mart planning next?"
Wal-Mart is huge, visible and determined, its happy-face grin covering deadly fangs, and it is just one force among many starting to threaten Europe's traditionally cozy retail environment. According to dozens of studies, not to mention the personal experiences of thousands of citizens, prices of everything from a can of tuna fish to an airplane ticket are high, often higher than they ought to be, and higher certainly than those across the Atlantic, if not those just across the border. Spurred by media campaigns, like the recent vociferous "Ripoff Britain" crusade, as well as a blossoming consumer savvy, European shoppers are starting to get mad as hell. And they may not have to take it much longer.
Experts agree that while prices across Europe will never harmonize entirely--differences in local tastes, national regulations, taxes and real estate values will always make sure of that--over the next decade or so they will converge, and likely downward. The rise of global retailers like Wal-Mart and Ikea is spurring competition and a shakeup of costly distribution practices. Slowly but ineluctably, the euro will offer shoppers the chance to make easy price comparisons, unclouded by fluctuating currency conversions. And greater ease of travel, along with the borderless, democratic Internet, already gives shoppers the ultimate weapon--knowledge--and the ultimate power to vote with their wallets. "Price differences have been too high in the past--differences you could not justify except by history," says Stéphane Garelli, professor of competition at the International Institute of Management Development and the University of Lausanne, both in Lausanne, Switzerland. "That is all going to change." In the short term at least, the consumer will be the prime beneficiary.
Witness the now annual migration in November and December as thousands of Britons head to the U.S. armed with empty suitcases and lengthy Christmas shopping lists. Throw in the cost of the flight, even a hotel, and a long weekend of materialistic frenzy in New York can still save money.
Or skip the nasty jet lag: "Food. Drink. Petrol. Christmas gifts. You name it. It's cheaper when you go to France," read a recent ad for Eurotunnel in a British newspaper.
Or watch how Holger Hinte shops for a new car. Not willing to accept the $18,000 sticker price for the Nissan Serena Seaside he had his heart set on, Hinte, spokesman at the Bonn Institute for the Future of Labor, got a list from the Internet of every Nissan dealer within 150 km of his home. After going to 12 car lots, he found his car at $2,800 off the list price--not bad for just one day's work.
Or visit your typical hypermarket, found on the outskirts of most cities in France, and witness the real French shopper: a bargain-minded citizen who feels no need to troll the local shops every day for that perfect poulet rôti. Hypermarkets now claim over 91% of French food sales.
The research confirms what these shoppers already know: prices vary dramatically across a broad range of goods and services, both within the E.U. and compared with the U.S. A 1998 McKinsey & Co. study uncovered a range of 50% in pharmaceutical prices and 30-40% for cars. A recent report by Kingfisher PLC, which operates 2700 European high-volume stores, including Superdrug, Woolworths, B & Q, Comet, Castorama and Darty, compared a basket of its own retail goods with a basket from comparable U.S. retailers and found the U.S. prices to be 10-40% lower, with the typical product costing 30% less. In September 1998, the British Treasury found that British consumers paid up to 56% more than Americans for all sorts of things, including furniture, hotels, electrical goods and cars.
What's going on? Are businesses simply robbing Europeans blind, or are there fundamental reasons that things must cost more here? Unlike in the U.S., which developed powerful antitrust laws in the early 20th century, European governments have tended to be more protective of business and more timid about letting unfettered competition rip. As Mario Monti, the European Commissioner for competition, explains, "The European organization of economic activities is one that has normally placed more emphasis on the interests of the producers--be it companies, be it workers--than with seeing things through the eyes of consumers." Some businesses are actually protected from the discipline of the market--France's privatized electricity firm Electricité de France, for instance, or German, Austrian and Swiss book publishers, who benefit from laws prohibiting booksellers from selling their product at a discount. Last year's landmark E.U. ruling in favor of the Austrian eyewear company Silhouette International prevents retailers from selling branded goods sourced outside the E.U. at cut-rate prices. The discounts offered on these so-called gray market goods--usually overruns or discontinued lines of such things as Levi's jeans or Calvin Klein underwear--are estimated to have saved U.K. consumers alone more than $2 billion a year.
Other companies, like Air France or British Telecommunications, rely on historic customer loyalty and patriotism to stomp on the competition. French shoppers continue to buy Renault and Peugeot cars knowing full well those makers exploit national preference by inflating prices at home. France Telecom continues to dominate the country's fixed and mobile phone markets because new entrants are daunted by its customer base and war chest, built through decades of actual monopoly. "There is a thin line between explicit anti-competitive behavior that would be deemed illegal, and a cultural dispensation against competing heavily on price," says Phil Evans, senior policy researcher at Britain's Consumers' Association. "People have been opting for a comfortable life, and no one is really shaking that up yet."
But retailers--and by extension their suppliers and distributors--should brace themselves for turbulence ahead. Britain's Competition Commission is in the midst of an investigation into U.K. supermarket chains on charges of profiteering and anti-competitive practices, which is expected to conclude in April. The Consumers' Association, meanwhile, has taken up the cause of British car prices, which last May the E.U. found to be the most expensive in Europe for 62 of the 75 best-selling cars. The Ford Focus, according to the E.U., voted European car of the year, is 38% more expensive in the U.K. than in Spain, and 56% more than in Denmark. Car prices have begun falling--but not fast enough for either the U.K. Competition Commission, which is aggressively investigating this matter, or the Consumers' Association, which has announced a scheme to import cars from the Continent for its 800,000 members.
Thousands of other Britons simply go to the Continent themselves for their car shopping. Similarly, border-dwelling Swiss and Germans have taken to doing the weekly food run in France. "People start to develop this idea that they should have the freedom to buy wherever they want, and can do so without too much difficulty," says Garelli.
But, protest retailers across Europe, prices are high for good reason--an assortment of them, in fact. Sales or vat taxes are generally higher in Europe than in the U.S.--running at 20.6% in France, 17.5% in the U.K., and around 16% in Germany, Spain and Italy, compared with the U.S.' 5% average--while across the E.U., tariff rates for all imports are on average 2.5% steeper. Such levies at least provide manufacturers with a ready, if debatable, rationalization. "We have the same fresh-off-the-boat price for each item," claims an official at the German sportswear company Adidas. "The reasons why a shoe we sell at $45 ends up costing $55 in France and $65 in Britain is really beyond our control." MORE->>
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