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INSIGHT – The difference is clear

As Emu approaches, it looks as though those companies least prepared could be hit by an unpleasant double whammy: price transparency and wage equalisation. Because these are uncharted waters, it is difficult to make predictions about what might happen.

But there are plenty of Jeremiahs around who suggest that the euro is such a money-quake it will rearrange some of the business geography of Europe. Yet it might not be bad news for every organisation.

“Those companies that are advanced in their thinking and development will not find it too much of an issue,” suggests Don Cuthbert, head of the Emu implementation strategy practice at consultants Towers Perrin.

“But for whole heaps of other companies it will be something of a difficulty.”

There are clear signs that business is waking up fast to the problems of price transparency. When management consultancy KPMG surveyed companies across Europe in 1996, only 3% mentioned price equalisation as an issue.

When it published the latest results at the end of 1997, that figure had jumped to 22%, the largest single rise in its survey.

“Because it’s getting closer, there is a lot more awareness of the changes that the euro will bring,” says Vicky Pryce, chief economist at KPMG.

“Some of the pricing issues are going to have a much greater strategic impact on business than the operational changes that will enable them to invoice and make payments in euros.”

And a new survey of 50 companies by Towers Perrin shows that few have promoted the issue high enough up their management agendas. Thirty of the companies had not considered Emu at all while only eight had looked at its impact in all areas of the business. Seventeen had considered its financial impact, 11 its human resources and nine its sales management implications.

But of all the Emu questions price transparency is going to be one of those chain-reaction issues that ripples right to the heart of a company’s competitiveness. The euro is going to expose the wide variations in pricing for the same products or commodities in different European markets. Disparities will come under an especially harsh spotlight in the automobile industry and consumer goods as well as food and drink. But all industries, even some that thought they might not be affected, such as companies making obscure components, will find this an increasingly important issue.

With prices quoted in euros across the Continent, previous disparities in national pricing will become much more noticeable. And with goods now more easily tradeable across frontiers, courtesy of the single European market, buyers will have more choices about where to source products – and at what prices.

The fact that Britain is outside the first wave of Emu makes little difference to those companies that sell in Europe: it is clear that customers will want prices quoted in euros. On the Continent, some companies have already taken the hint. Hypermarket chain Carrefour already buys centrally across Europe at one price. So does the Dutch wholesaler Makro.

But not all companies take the same line. Unilever, which boasts a host of the most famous brand names under its corporate banner, reckons price transparency won’t mean much to the consumer of low-cost items. It doesn’t think consumers will take much notice what they pay for the same product from country to country.

Other industries, such as motor cars, face a tougher problem. The wide disparities in pricing across Europe are already causing market hopping – with consumers buying their cars in another market, then importing them.

The number of British people buying cars in the Netherlands, where the pre-tax price for most models is significantly lower, is growing. Germans and Austrians buy Volkswagens in Italy for the same reason.

The car-makers seem to be adopting different strategies to tackle this problem. Saab, for example, plans to reduce the number of different variants of models offered from country to country. It reckons that if it can do this faster than rivals it can grab more market share.

But Renault plans to continue asking more for its cars in its home market than other countries. It reckons the thick-on-the-ground support network it provides in France will act as a competitive differentiator and allow it to charge higher prices.

The comparative approaches of the car-makers highlight some of the issues other businesses need to address. In fact, there are two distinct scenarios – the first where a company is making a business-to-business sale along a supply chain and the second where it is selling its product direct to the end consumer.

In the first case, as Cuthbert notes, prices are increasingly going to be negotiated Europe-wide. Depending on the relative strengths of the negotiating parties, the buyer and seller will strike a price between the lowest and the highest in Europe. As Cuthbert says: “It may not be the lowest but it is certainly not going to be the highest.”

Companies selling to end consumers face a different range of problems.

For example, the strict conversion criteria for national currencies to euros could throw what was a carefully designed strategy of pack sizes and price points into confusion. Does a company with a new odd-looking post-conversion price of, say, euro 2.17 shave it back to 1.99 and sacrifice profitability or decrease the pack size and lose competitiveness?

Cuthbert points out that many consumer businesses rely on leading or “signal” prices which lodge in the consumer’s mind and create a view about the value for money the company offers. Most of these signal prices will be affected by conversion to euro. Many companies will need to develop a strategy that creates new and clearly communicated links between signal price and value.

How can a company protect itself from the price part of the double whammy?

Vicky Pryce says those companies preparing effectively for the euro are already looking closely at their cost structure. “They will seek to become more efficient and may look at new ways of selling,” she says. Where they exist, there may be moves to cut out the “middleman” in order to take cost out of the factory-to-consumer chain.

“Become more efficient by integrating your operations,” she advises.

“For example, cutting down on labour and concentrating some services in one particular place. Rethink your banking relationships to reduce costs.

Make your subsidiaries all behave and buy similarly. There are a lot of companies that currently operate with independent fiefdoms across Europe.

They clearly can’t carry on doing that if they face much more competitive markets.”

Pryce also reckons many companies ought to be looking at how they can differentiate their products in non-price ways. For example, electrical goods could have added features which might justify a higher price in some markets rather than others. “You could add a little bit extra in different countries and call the product something different which would justify a price differential,” she says.

The other punch from the double whammy is what will happen to wages under Emu. KPMG’s survey found that 27% of companies thought wages would rise under the single currency, double the number that thought they would fall.

But the more recent Towers Perrin survey suggests that more than half (27 out of the 50 companies) believe Emu will lead to pan-European pay agreements, a scenario that is bound to increase wage rates.

Towers Perrin found that among the companies expecting pan-European pay, most thought multinationals would be affected first. Much will depend on the mobility of labour and there will still be a locally determined element in the pay, rather along the lines of the “London weighting”.

Cuthbert says the pressure of pan-European pay will vary significantly across sectors with manufacturing, where unions are most strongly organised, the hardest hit. “The unions will be fighting for pan-European pay negotiations and, in some sectors, they have a chance of winning.”

But Pryce believes that, although there will be movements in wages, it will be a longer term issue. “Companies will gradually realise that if you are running a multinational, and moving people from one country to another, you can’t sustain different salaries for the same type of work.”

Cuthbert worries that much of the Emu preparation work companies are doing focuses on the operational issues to the exclusion of strategic questions. More than any other change, the euro will start to make the single market a reality. It is a step change with potentially vast knock-on consequences.

Pryce believes Emu could re-arrange the shape of many different markets across Europe with consolidation being a keynote. The pace of mergers and acquisitions in one industry after another could accelerate as Emu comes closer.

Those companies that think through an effective strategy could even emerge stronger from this double whammy. But, with too many British companies still treating Emu as something that doesn’t apply to them, there will certainly be some that end up on the canvas. Out for the count.

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