Case study: Running hard to stand still

Listen to this article


In belt-tightening times, you would expect companies like McBride to do well.

As Europe’s leading supplier of private-label household cleaning and personal care products, McBride should be well positioned to gain, literally, from what retail commentators in the UK are calling the “Aldi” effect” – the trading down among consumers to supermarket’s cheaper own-brands products.

Aldi is among a wide range of retailers McBride supplies across the UK and Europe, with Tesco, Somerfield and Marks and Spencer in the UK, Carrefour and Auchan in France, and Metro and Lidl in Germany also numbered among its roster of customers.

As Miles Roberts, chief executive, noted when presenting McBride’s full-year results this month, McBride’s own-brand products “have never been more relevant than in the current environment where disposable incomes are under significant pressure”.

But if demand for the company’s range of detergents, toilet cleaners, shampoos, deodorants and air fresheners remains generally buoyant, McBride has also been hit hard by increased costs, with Mr Roberts admitting that “the year to June 2008 was dominated by the need to manage the impact of unprecedented input cost inflation”.

The end result was McBride having to run hard to stand still.

Adjusted group operating profit slipped from £16.4m ($29.5m) to £16.0m. This performance reflected increased raw material costs that were only partially mitigated by “operational efficiencies, purchasing savings and the contribution from recent acquisitions”.

Revenues grew by 23 per cent to £342.9m in the year to June 30, with the acquisitions of Dasty Italia, Henkel’s European private-label household products business, and Bolton-based Darcy contributing substantially to the increase.

But organic revenue – stripping out the impact of acquisitions – actually declined 2 per cent overall as customers resisted attempts to pass on cost increases.

“Given the severity of the environment, selling-price increases were necessary across most products for the first time in many years,” explained Mr Roberts.

But McBride suffered as some retail customers reduced promotional activity during pricing negotiations, which “had a consequential effect on volumes, overcapacity and declining demand in certain categories”.

McBride’s vulnerability to cost inflation can be gleaned immediately from its own homepage which, while noting its status as a FTSE company with an annual turnover of £500m, also specifies it spends more than £250m a year on chemicals, surfactants, perfumes, and packaging.

Higher oil prices in particular have fed through to higher prices for plastics and petro-chemicals used as ingredients across much of its product range.

In this respect, McBride is not alone. Far larger international competitors of McBride such as Henkel, Beiersdorf, Reckitt Benckiser, and L’Oréal all face similar issues in passing on cost increases while seeking to maintain market share for their more heavily advertising brands in leading European markets.

And while L’Oréal may entice consumers to spend more on their range of personal care products with the mantra “Because I’m worth it”, recent sales data suggests consumers are increasingly willing to shop around for value.

Latest analysis of sales of household and personal care products in Europe by New York-based brokers Sanford C Bernstein, based on Nielsen market research data, suggests private-label goods, such as those produced by McBride, continued to gain ground in the four weeks to August 17 in both household goods and cosmetics and toiletries against more illustrious branded rivals. Against this background, McBride has proved largely successful in passing on increased costs to customers – in spite of the short-term disruption to sales caused by negotiations with trickier customers less willing to accept its own price increases.

In this month’s results statement, McBride noted it had been discussing price increases with its customers, adding that “to date, a significant proportion of these cost increases have been recovered”.

But it was the time-lag between cost and selling-price increases that has impacted margins for the year, having an adverse impact on overall growth and profitability. As a result, its financial performance in the year fell “below our original expectations,” it conceded.

Nevertheless, having weathered the storm of cost inflation, McBride still sees itself relatively well positioned to face the future. As a consumer goods company, it is vulnerable along with its peers to concerns over a slowdown in consumer spending.

That concern is reflected in the 35 per cent fall in McBride’s share price over the the last year – which exceeds the more gentle decline in the FSTE all-share index.

But despite sales wobbles in some categories of household and personal care products across Europe created by economic uncertainty, in more straitened times private-label sales continue to outperform the overall market as consumers seek to economise. And that “Aldi effect” is set to continue, according to McBride.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from and redistribute by email or post to the web.