The Food Chain

Europe's giant food retailers have accumulated massive buyer power, forcing strategic change right through the supply chain.

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.”


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