* Signs of deflation in company earnings results
* Success of discount retailers adds to pressure
* Southern Europe economies rebound as north struggles
By Martinne Geller
LONDON, July 29 Weak consumer spending and
intense competition among retailers are forcing some makers of
packaged goods to lower their prices, intensifying the threat of
euro zone deflation.
Annual inflation is running at just 0.5 percent in the
currency area, well into what the European Central Bank has
described as a "danger zone" below 1 percent, and could fall
further when figures for July are released later this week.
The ECB has said it sees no signs that financial markets or
consumers expect a prolonged period of prices falling across the
economy - as Japan experienced in its "lost decade" when people
deferred spending in the knowledge that goods and services would
get cheaper - thereby creating a downward economic spiral.
Yet some signs of deflation are already evident in corporate
earnings results, as retailers and consumer goods manufacturers
struggle with consumers' reluctance to spend freely.
The evidence points, at the very least, to a prolonged
period of what economists have called "lowflation", which would
be likely to curb economic recovery.
"Spending is much more targeted, more thought-through," said
Ed Hudson, consumer products leader in Britain for professional
services firm EY. "It is very hard for the consumer packaged
goods companies to put up prices, or indeed offer great big
Unilever, maker of Dove soap and Ben & Jerry's ice
cream, reported a 1.9 percent fall in its European pricing in
the second quarter ended on June 30, as declines in Germany,
France and the Netherlands offset increases in the recovering
markets of Spain, Italy and Greece.
"There are two stories taking place in Europe," said
Unilever Chief Financial Officer Jean-Marc Huet, referring to
how the southern countries - which were harder-hit by the euro
zone crisis than northern neighbours - were now seeing some
That fits with recent signs of economic recovery in Spain
and even Greece, albeit from a very low base, while the French
economy is flatlining, the Netherlands contracted in the first
quarter and the Bundesbank forecasts the dominant German economy
achieved no growth in the second three months of the year.
"The macroeconomic environment, the discounters and
promotional competitive activities have not been helpful," Huet
said. Unilever's overall prices rose 1.9 percent in the first
half thanks to pricing power in emerging markets.
Rival Nestle has seen the same. When the world's
largest food group posted first-quarter results in April, it
said overall pricing rose 1.6 percent, but fell in Europe.
Nestle will report half-year results on Aug. 7.
Companies such as Nestle and Unilever have been pressured by
the success of discount retailers Aldi and Lidl
, which have also eroded sales and profits for retail
rivals including Spain's Dia.
Dia, spun off from France's Carrefour in 2011, reported a
5.6 percent drop in like-for-like quarterly sales in Spain and
Portugal on Monday, due to price competition despite a fledgling
Ricardo Curras, chief executive of Dia, said he expects
deflation to continue into the third quarter, with some
improvement in the last quarter.
In Britain, struggling Tesco and Wm Morrison
are trying to revive sales by cutting prices, while in
France, Casino's first-half trading profit was hit by
price cuts, particularly at its Leader Price discount stores.
After a poor second quarter, there are some signs of a
rebound in euro zone activity.
In July, the euro zone's services sector expanded at its
fastest pace since May 2011 but higher growth in new business
was driven mainly by companies cutting prices, according to the
Markit Composite Purchasing Managers' Index (PMI).
Euro zone service firms have now cut prices for 31
months despite high raw material costs, meaning profits are
squeezed unless they can reduce costs elsewhere.
"Generally the European market is still in the deflationary
stage for most household and consumer staples goods," said
Fintan Ryan, an analyst with Berenberg Bank.
(Additional reporting by Sumanta Dey in Bangalore and Sarah
Morris in Madrid; editing by David Stamp)